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

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

December 3, 2018

We expect the Chilean central bank to keep the policy rate stable at 2.75%, while the market is divided between stability and a 25bps hike.

All LatAm: The Fed’s indication that rate hikes from now on will be more data dependent have been helping the price action for EMs, as it reduces the risk of higher rates in the U.S. Long-term rates declined in Chile and Colombia last week, Mexico’s remained relatively stable despite domestic concerns, and Brazil’s widened after the strong rally of recent months, and still lack of clarity on the reform agenda.

The G20 summit in Argentina brought positive news on the trade front, as the Xi-Trump dinner reportedly led to a truce in the trade war – although this may not last beyond 1Q19. President Trump agreed not raise tariffs to 25% on January 1, while China agreed on substantial purchases of U.S. goods to reduce the trade imbalance between our two countries, among other topics. Even if temporary, the agreement between the two countries may improve market sentiment regarding China and emerging markets as whole. 

BRAZIL: Brazilian local rates widened slightly between 5 and 10bps last week, after a strong rally in recent months. The voting on the Transfer of Rights bill was postponed again, apparently because the government believes that splitting the collected money with the states and municipalities could be accounted as expenditure, thus having an impact on the spending cap. In addition, local news (O Globo) indicate the new economic team plans on sending a new version of pension reform in March, which would delay the approval process in Congress.

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 industrial production (Tue.) and November’s IPCA inflation (Fri.).

CHILE: We expect the central bank to keep the policy rate stable at 2.75%, while the market is divided between stability and a 25bps hike. In October, the board unanimously raised the policy rate by 25bps to 2.75%. Nevertheless, they made a concerted effort to convey that the normalization cycle would be gradual, retaining policy flexibility if the major changes to its baseline scenario unfold. Given that activity softened in 3Q18, core inflation remains subdued and diverse labor market indicators continue to show mixed signals, we expect steady rates this month, but the tightening cycle to resume in the subsequent meetings.

MEXICO: Local rates declined a bit at the front-end, and remained relatively stable last week. Concerns over domestic policy in Mexico remain very much alive, but the softening tone by the Fed contributed to ease pressure on local rates. We have no position in Mexico today, despite the high level of rates historically.

Mexico’s new president Andres Manuel Lopez Obrador was sworn in on Saturady (Dec-1) in the National Congress for a six-year term as the country’s head of state.

On the data side, November’s CPI will be the main release (Fri.).

 



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