Itaú BBA - Weekly Fixed Income LatAm Strategy: We continue to receive rates at the belly of the curve in Brazil

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Weekly Fixed Income LatAm Strategy: We continue to receive rates at the belly of the curve in Brazil

October 15, 2018

We believe the belly (specifically Jan 21) is the best part of the curve to receive

BRAZIL: Local rates tightened substantially last week, with the belly outperforming the rest of the curve. We believe the belly (specifically Jan 21) is the best part of the curve to receive. Substantial rate hikes are still priced in the short term, but the only pressure on inflation stems from BRL depreciation, given the wide output gap, high unemployment and, consequently, low services inflation. At current BRL levels, we see BCB on hold for a longer time than the market. On the other hand, risks to Brazil’s fiscal outlook will remain alive after the election, which doesn’t bode well for the long-end of the curve. Our DI Jan 21 outright receiver currently posts a 28bps gain.

At the IMF Bali meetings, both BCB Governor Goldfajn and Deputy Governor Berriel emphasized that the monetary policy guidance stays the same relative to the message conveyed in the most recent documents. With the recent BRL appreciation, this is consistent with no rate hikes soon, in our view.

Recent voting intention polls indicate a victory for Jair Bolsonaro (PSL) against Fernando Haddad (PT) in the runoff scheduled for October 28th. In recent reports, we’ve shown that second-round polls have usually been good predictors of the final election result. Further polls this week will remain on focus, while the macro agenda is relatively empty. As informed by the Superior Electoral Court, Ibope (October 15), Real Time Big Data (October 15), Datafolha (October 18) and Datapoder360 (October 18).

MEXICO: The highlight of the week will be Banxico’s minutes of October’s monetary policy meeting. We expect the minutes to further explain the reasons behind one board member’s vote for a 25-bp hike. Also, we expect to see more detail about Banxico’s concerns on the inflation outlook. The main reason for the tightening bias introduced recently - and this was highlighted by authorities during the IMF Bali meetings - is related to the fact that headline inflation remains very high (due to energy prices), threatening the evolution of core inflation through second round effects. Our 5-year TIIE receiver (FX-hedged) currently posts a 39bps loss, as the market moved to price in almost 20bps in hikes over the next 3 months. Given that we see the recent pickup in inflation as temporary, NAFTA renegotiation was concluded, and rates are already at high levels historically, we expect Banxico to stay on hold in upcoming meetings, and thus keep our receiver.

CHILE: We expect the central bank to hike rates by 25bps to 2.75% (Thu.). In September, the internal debate was centered on the appropriate timing for the first hike of the cycle. The board seems convinced that improved macroeconomic conditions are sufficient to drive inflation to the 3% target, supporting the start of the normalization process. Furthermore, in its view, delaying the start of the tightening cycle would likely require a more aggressive cycle. While the board’s messaging has failed to have widespread buy-in, with 83% of economic analysts surveyed by the central bank expecting steady rates this month, the rates market priced in the hike. We believe that neither activity nor inflation data leading up to the meeting sufficiently surprised to alter the board’s outlook.

COLOMBIA: We continue to receive outright 1-year IBR rates, currently with a 20bps gain. This week keep an eye on economic activity indicators. Colombia’s economy is still operating with slack, so we see no pressure on inflation going forward.

 



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