Itaú BBA - Weekly Fixed Income LatAm Strategy: We expect Brazil to keep rates stable this week

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Weekly Fixed Income LatAm Strategy: We expect Brazil to keep rates stable this week

December 10, 2018

The BCB will likely keep the SELIC rate at 6.5% and indicate that the balance of risks has again become symmetric

All LatAm: Despite the agreement between U.S and China to halt new tariffs for 90 days to allow for further negotiations, the Trade War news flow remains ambiguous, continuing to pressure EM assets. Over the last days some reports indicated that president Trump's initiative to increase dialogue with China is a reaction to the US equities sell-off. That being the case, all eyes are now on the US visit by Chinese Vice PM Liu He – which might happen this week – to negotiate trade issues. After the arrest of Huawei Technologies’ CFO last week, it is unclear whether this trip will happen.

On economic data, weaker-than-expected Payroll figures provide support to FOMC’s decision to step into a data-dependent mode after December’s hike.

BRAZIL: Last week local rates fell between 10-20bps for 2020-21 and widened at a similar intensity for longer tenors, after some overall widening in the previous week and a strong rally in recent months. November’s IPCA inflation came in at a negative 0.21%, below the floor of market expectations – the lowest November reading since 1994. Year-to-date, inflation reached 3.59%. Over 12 months, inflation decreased to 4.05%, from 4.56% in October. On the political side, mixed news on the plans of the new economic team for the pension reform. A couple reports indicate a lighter version, while others suggest a piecemeal approach that draws content from the current proposal at first and introduces deeper changes – such as a capitalization scheme – only in subsequent efforts. Regarding the transfer of rights bill, most reports now deem the voting likely to happen only next year.

The Brazilian Central Bank's Monetary Policy Committee will likely keep the Selic rate at 6.5% p.a. this Wednesday. In addition to that, we believe it may change the communication to indicate that the balance of risks to inflation has again become symmetric, and is no longer tilted to the upside. See more details in our Copom Cockpit.

We have no position in Brazil today, but believe that long-term real rates are attractive. We are waiting for clearer signs on the reform agenda to fully recommend receiving.

This week, keep an eye on October’s retail sales (Thu.) and service sector survey (Fri.).

MEXICO: Local rates showed some widening throughout the curve, but 10-year rates fell around 10bps. November’s CPI came in at 0.85%, above the median of market expectations (0.74%). With that result, the 12-month reading receded to 4.72% (from 4.90%). We have no position in Mexico today, despite the high level of rates historically.

This week, AMLO’s budget will be published and might generate some noise. In presidential transition years, the budget has to be sent to Congress for deliberation no later than December 15th.

On the data front, watch for October’s industrial production on Wednesday and the central bank’s expectations survey on Friday.

CHILE: Local rates retreated by 5-10bps at the front end, less than that at longer tenors. The central bank kept the policy rate at 2.75% as expected, pausing in line with a gradual tightening cycle. Later in the week, the Inflation Report indicated that the central bank sees the policy rate reaching neutral levels (4%-4.5%) in 1H20. Inflation was expectedly low in November, dragged down by lower fuel prices, but core pressures were also contained. As global oil prices are lower and growth remains moderate, inflation will likely face downward pressures going forward. We now expect inflation to end the year at 2.7%, with a null monthly change in December.

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