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sexta-feira, abril 27, 2012

MACRO MARKETS DAILY - Spain’s rating and Italy BTP auctions

MACRO MARKETS DAILYSpain’s rating and Italy BTP auctions

· S&P downgraded Spain by two notches last night to BBB+ from A, with a negative outlook. Spain is now A3 /BBB+ /A. S&P also rates Italy and Ireland BBB+.
· Given the rating agencies' reaction function and the recent market dynamics (Spanish CDS recently reached its all-time highs above 500bp, although they closed yesterday c.470bp), some form of rating action in coming weeks was not completely unexpected, although it has probably come earlier than expected and the magnitude (two notches) was also greater than market participants expected, especially considering that S&P’s last downgrade was in January.
· The BTP auction will be the other focus today, as the Tesoro taps up to €2.5bn in 2017 and €2.5bn in 2022 BTPs, as well as 2016 and 2019 off-the-runs.
· GBP Rates: Market uncertainty on the real level of economic activity, the degree to which the situation in the Euro area will deteriorate and the surrounding BoE policy-making should keep gilts in their current ranges.
· FX: EUR/USD down on Spain’s ratings cut, whilst BoJ extends it asset purchases by JPY10trn.
· Economics: Personal spending measures in the Euro area are still frail, with the possible exception of France. The Spanish unemployment rate is high, but is still moving north. US Q1 growth numbers should show a similar pace as in the previous quarter, but with a more balanced pattern.

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quinta-feira, abril 26, 2012

Brazil: Copom Minutes - Sliding Doors

· First thoughts: In a preliminary reading of the minutes, two points draw attention: first, the Copom no longer mentions that it expects the Selic to accommodate in a level “slightly above the historical lows”. Second, they explicitly mention that “any further easing must be conducted with parsimony”. Elsewhere, the minutes do not bring any material change in Copom’s views on the international scenario and somewhat downplayed the inflation risks stemming from the economic activity, leading to an overall benign outlook for inflation. Forecasts raised from the previous meeting, and stand around the center of the target in 2012 and above the center of target in 2013 in the reference scenario, likely as a consequence of the weaker BRL. With this combination, the Copom no longer restrains itself to stop the easing cycle at the current 9% pa, at the same time it signals to the market that, while more cuts may be forthcoming, they will be more contained both in magnitude and pace. It seems an effort to limit markets’ bets on a more aggressive easing at this point.

· Bottom line: The minutes do not imply a strong commitment of the Copom with neither a stop not an additional easing, therefore reinforcing that the Central Bank’s decisions will be data-dependent. Markets will likely debate on whether the “parsimony” means slowing the pace of cuts to 50 or 25bps, which may imply in some movement in the short end of the curve. At the same time, today’s minutes may fuel the debate on where the Selic will be at end-year, given that there is no longer a mention to a “floor”. Considering the slower pace, the expectation of low inflation for the next months and the still-binding constraint associated with the savings accounts rules, we expect markets’ bets to stay within the 8 to 8.5% pa range.

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quarta-feira, abril 25, 2012

Brazil: better credit conditions in March

· Credit Mar/12: +1.7%m/m (Santander: +2.0%m/m, previous: +0.4%m/m)

· As anticipated the March credit data showed improve compared to the previous month: the credit grew 1.7%m/m due to the earmarked and non-earmarked credit, the grantings registered somewhat increase. It was also observed decreased in the interest rate and spreads (both to individual and corporate) and the average maturity posted expansion. It is important bear in mind that this data refers to March, so the drop off in the interest rate was not provided by the public banks, this movement is likely to be seen in April´s data. 

This better performance is likely due to the decline in the delinquency rate (5.7% versus 5.8% in February) – motivated especially by the individuals delinquency rate which decreased to 7.4% versus 7.6% reached in previous month. Indeed, we already expected decrease in the delinquency rate, as a result of the current favorable conditions in labor market and the better financials conditions, as we can see in the debt burden indicators. On the other hand, the individual´s delinquency rate of vehicles remained increasing, reaching the highest level of the historical series (5.7%), and it may continue to deteriorate the credit to this segment since the credit suppliers will likely remain cautious. 

· Bottom line: The credit market may continue to improve in upcoming months as a result of the current favorable conditions in labor market and the low basic interest rate. But we expect some changes in the mix of segments, for example, the credit to vehicles may decrease while the credit to housing may gain some room.

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terça-feira, abril 24, 2012

Brazil (April IPCA-15): April's details

· Apr12 IPCA-15: +0.43%m/m (Consensus: +0.37%m/m; Santander: +0.37%m/m, 12 months accumulated: 5.25%)

· First thoughts: Comparing with the Apr/11 IPCA-15 (0.77%m/m), the main contributions for inflation deceleration were foodstuff, apparel and transport, mainly due to the fuel inflation (0.4% m/m vs 5.3% m/m posted in Apr/11) and foodstuff away from home (0.3% m/m vs 0.9% m/m). Comparing with our forecast for IPCA-15 Apr/12, surprises were inflation acceleration in housing, thanks to the hike in rent and condominium fee ( 0.8% m/m and 1% m/m, respectively) and communication, due to inflation acceleration in fixed telephone tariffs, which we believe should be zero in April IPCA. Comparing with the March/12 IPCA, the seasonal pressures coming from apparel inflation, and further pressures from personal expenditures (mainly due to the hike in cigarettes prices and in housekeeper wages), and health (due to the hike in medicine prices) were the main contributions for the outcome.

· Bottom line: The inflation acceleration between March IPCA (0.21% m/m) and April IPCA-15 (0.43% m/m) is in line with a list of inflationary pressures that are expected for this month: the price of medicine was readjusted about 2.81% on average (on April 1), there was a hike in the cigarette prices of 24%, thanks to the tax increase (on April 6), the water and sewer tariffs had a readjustment of 11% on average in some cities with weights about 22% in the regional composition of the IPCA (between the end of March and beginning of April), the crop shortfall of beans (in April), and the seasonal hike in apparel prices. Thus, we forecast 0.61% m/m for April IPCA (versus a consensus forecast of 0.54% m/m), and our forecast for cumulative inflation in 2Q12 is 1.15%, while consensus stands at 1.30%. Additionally, it is worth noting that the tradable disinflation seems to have lost steam, likely as a consequence of weaker BRL.

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segunda-feira, abril 23, 2012

Humor externo piora e dólar fecha no maior preço desde novembro

Humor externo piora e dólar fecha no maior preço desde novembro

Por Eduardo Campos | Valor 
A formação da taxa de câmbio no mercado local ficou alinhada aos acontecimentos externos desta segunda-feira. O tom piorou e aversão ao risco subiu depois que os índices de atividade da China, Alemanha e zona do euro surpreenderam para baixo.

No âmbito doméstico, o giro estimando para o mercado interbancário ficou ao redor de US$ 1,2 bilhão e o Banco Central (BC) não apareceu para fazer compras no mercado à vista.

Depois de fazer máxima a R$ 1,892 (+1,18%), o dólar comercial encerrou o dia com alta de 0,70%, a R$ 1,883 na venda, maior cotação desde o fim de novembro do ano passado.

Na Bolsa de Mercadorias & Futuros (BM&F), o dólar com vencimento em maio apontava valorização de 0,50%, a R$ 1,8855, antes do ajuste final. Na máxima, o contrato foi a R$ 1,8945.

Pela análise gráfica do Nomura, a linha a ser observada é o R$ 1,893. Superada essa linha, o dólar buscaria o R$ 1,920 (máxima de novembro) e, posteriormente o R$ 1,976.

Também na BM&F, o dólar pronto fechou com alta de 0,83%, a R$ 1,8817. O volume foi de US$ 53 milhões, contra US$ 40,5 milhões na sexta-feira.

No câmbio externo, outras moedas emergentes, como o dólar australiano e o peso mexicano, também perderam valor. O euro caiu 0,21%, a US$ 1,315, mas chegou a fazer mínima a R$ 1,31. Já o Dollar Index, que mede o desempenho da divisa americana ante uma cesta de moedas, subiu 0,29%, a 79,37 pontos.

Ilustrando esse aumento na aversão ao risco, o VIX, que mede a volatilidade das opções na bolsa americana e é visto com um termômetro do medo do mercado, subiu 9%, a 19 pontos, mas chegou a saltar 15%, indo acima dos 20 pontos.

Além de dados econômicos negativos, a instabilidade política na zona do euro também fez preço nos mercados. A Holanda está sem primeiro ministro depois de desavenças sobre cortes orçamentários.

Ainda na região, o segundo turno das eleições francesas chega às mesas de operação. O socialista François Hollande liderou o primeiro turno das eleições contra o atual presidente Nicolas Sarkozy. Uma vitória de Hollande seria mal recebida pelos mercados conforme o candidato promete rever acordos fechados com a Alemanha e fala em cortes de gastos menos drásticos. O segundo turno ocorre dia 6 de maio.

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quinta-feira, abril 19, 2012

Central Bank cuts rates by 75 bps and leaves door open for further cuts

Brazil Monetary Policy

Central Bank cuts rates by 75 bps and leaves door open for further cuts


The monetary policy committee (Copom) of Brazil’s Central Bank cut the Selic policy rate by 75 bps, to 9% in line with market expectations. Our impression is that the statement published after the meeting (our translation below) leaves the door wide open for further cuts.

“The Copom considers that risks to the trajectory of inflation remain limited at this moment. The Committee also notes that to date, given the fragility of the global economy, the contribution of the external scenario has been deflationary. In light of this, continuing the process of adjustment of monetary conditions, the Copom unanimously decided to reduce the Selic rate to 9%, without bias.”

Economics View

In our view, the statement strongly hints at more interest rate cuts in the pipeline. The Central Bank states that inflationary risks are limited and that the external backdrop has been deflationary. Perhaps most strikingly, it retained the phrase “continuing the process of adjustment of monetary conditions”, which may be interpreted by investors as a suggestion that the adjustment process is still ongoing. This is contrary to what we had expected. Considering the deterioration of long-term inflation expectations and the direct language used by the Central Bank to signal that 9% would be an appropriate level for interest rates, we expected the Central Bank to make it clear they intended to end the easing cycle.

We therefore attribute a higher probability to further interest rate cuts in May. That said, after March, when a dovish surprise at the COPOM meeting (the 75 bps cut) was followed by minutes that were considered hawkish, investors should be cautious in interpreting the Central Bank’s language in the statement, which we believe requires clarification in minutes of the meeting (to be published next week on 26 April).

Fixed Income Strategy view

Going into the April meeting, the front end of the curve prices was pricing in a 75bp cut with about 70% probability relative to a 50bp move. Based on this alone, we would expect the front end of the DI curve to rally 5-8bps all things equal. In addition, we believe it is likely that the market will take the statement as an indication that COPOM is willing to take the SELIC even lower from here. A SELIC level of 8.75% is already priced in, but we see room for the front end to price in a move towards 8.50% with some probability. In that sense, we believe that bullish sentiment will prevail in the near term. The COPOM minutes next week will give us better guidance as to how far implied pricing should go. Our bias remains for a steeper curve overall.

FX Strategy View

The possibility that the COPOM could continue cutting rates below 9% adds additional headwinds to an already poor near-term BRL outlook. As a signal, further cuts would reassert the perceived increased coordination between monetary and FX policy and thus reaffirm the “intervention premium” with which the BRL has been trading relative peers. From a pure carry perspective, the prospect of lower interest rate differentials becomes more sensitive at a time when onshore dollar rates are shooting higher. Until recently, BRL NDF implied yields had maintained a rising trend despite the BCB’s easing cycle because strong dollar inflows were keeping onshore dollar rates depressed. However, in recent weeks FX inflows have subsided while the BCB has increased its spot purchases reducing the supply of USD in the system. As a result, onshore dollar rates have spiked over 100bp in the 1 mo. FRA contract month-to-date while BRL NDF 1 mo implied yields have contracted by 200bp to c6.5%. The combination of lower carry, higher volatility, still uncertain monetary policy path, and sustained intervention risk keeps the bias for the price action on USD-BRL still on the upside, in our view. We maintain a neutral-to-bearish view short term but would be looking at improving valuations to open new opportunities for a correction play. What we think: As expected, the Central Bank cut the Selic rate by 75 bps. The language of the statement was more dovish than was anticipated, leaves the door open for further easing and, in our view, requires clarification in the minutes. The statement may support bullish sentiment in the short end of the DI curve, but seems bearish for the BRL.

Constantin Jancsó (Economist), Gordian Kemen (Strategist) and Marjorie Hernandez (Strategist) 
Source: HSBC

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sexta-feira, abril 13, 2012


The devil is in the details

Source: Tatiana Pinheiro

Without a doubt the consumer price inflation was lower than expected in 1Q12 (1.22%), in terms of both the consensus expectation (1.49%) and the BCB's reference scenario (1.86%) at the beginning of this year. We were surprised as well; our IPCA expectation was 1.37% for 1Q12. Additionally, there was confirmed deflation in the São Paulo electricity tariff, which is good news for the inflationary backdrop. This note will focus on the pipeline for IPCA in the upcoming months.

Nevertheless, we believe it is worthwhile to go into detail about some events that may occur in the short term. First, the electricity tariff revision in São Paulo was finally determined ; it was originally scheduled for 2011, but was delayed to 2012, and will be applied in July this year. Aneel, the Brazilian electricity regulatory agency that regulates the prices in the sector, proposed an 8.81% cut for final customers (a 5.14% core-tariff reduction + additional reduction from financial components). The proposal will be subject to a public hearing from April 12 until May 11, after which the final electricity tariff readjustment will be defined for 2012 we estimate it might reach -6.5%, taking into account the electricity tariff revision of -8.81%, the cost of the delay in applying the revision, and the inflation accumulated in the last 12 months. The cost of the delay will be divided into three installments, to be applied in the next three years, which means that 1/3 of -8.81% will be applied this year, and we estimate the 12-month accumulated inflation of approximately 5%. If our estimate is confirmed, the total impact on the IPCA headline will be -7 bps, which will be slightly higher than we expected (-6 bps). This event for July IPCA is relevant because it might curb monthly inflation to close to zero. The seasonal pattern of inflation from May to July is very favorable, mainly because there is no pressure coming from foodstuff inflation, there is deflation in ethanol prices as a result of the beginning of the harvest, electricity tariff readjustments are the main regulated prices to be determined, and there are no significant pressures coming from apparel and services. That said, our forecast for cumulative inflation in 3Q12 is 0.65%, while the consensus is 0.94%.

With respect to the very short term (April and May), herewith a list of inflationary pressures: the price of medicine was readjusted about 2.81% on average (on April 1), there was a hike in the cigarette prices of 24%, thanks to the tax increase (on April 6), the water and sewer tariffs had a readjustment of 11% on average in some cities with weights about 22% in the regional composition of the IPCA (between the end of March and beginning of April), the crop shortfall of beans and ground crops off season (in April), some hike in meat prices (in May), and the seasonal hike in apparel prices. Additionally, in April it is likely that the fixed telephony tariff will register an increase of approximately 1% in prices due to a hike in the tariff of fixed-to-mobile calls for all cities that compose the IPCA, except São Paulo. Thus, we forecast 0.65% m/m for April IPCA (versus a consensus forecast of 0.54% m/m) and 0.40% m/m for May IPCA (versus a consensus forecast of 0.5% m/m), and our forecast for cumulative inflation in 2Q12 is 1.15%, while consensus stands at 1.27%.

Looking into 2H2012, we only find sources of inflationary pressures from September on, considering a baseline scenario of no international disruption. The IPCA Index is expected to inherit pressures such as: (1) high inflation in 2011 will be taken as the reference for indexing annual wage readjustments in several economic sectors, which for the most part takes place in 2H12; and (2) the economic recovery is poised to intensify in 2H12, which should promote an inflation acceleration of the services, semi-durable and non-durable goods prices. The two factors are linked to the recent monetary easing. The first one is a result of a tight labor market. The second factor is related to the lagged effects of the aggressive monetary easing started in 3Q11. However, at the end of the day, despite all the inflation pressure that is expected in 2H12, the inflation accumulated in 2012 should be 5%, which would be a much better outcome than 2011 inflation.
In our opinion, the heating up of domestic demand should have a larger impact on 2013 inflation, and without favorable exogenous shocks in regulated prices and service prices hovering around 9%.

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segunda-feira, abril 09, 2012

IPCA apresenta resultado abaixo do esperado

São Paulo, 09 de abril de 2012

Hoje: FGV – IGP-DI (mar/12) • FGV - IPC-S (até 8/abr) • BCB - Boletim Focus (fev) • EUA – Discurso de Ben Bernanke • EUA- Exportações* (mar/12) • EUA - Importações* (mar/12) • EUA - IED* (mar/12) • EUA - Concessões de empréstimos* (mar/12) • China - Produção Industrial (dez) • China - PIB (4T) • China - Vendas no Varejo (dez) • China - IED (dez)

• Focus: mercado reduz expectativa para IPCA 2012
• Alta nos preços de agropecuários e industriais deve influenciar IGP-DI
• IPCA apresenta resultado abaixo do esperado

• EUA: criação de empregos decepciona

• Ibovespa foge ao clima de instabilidade internacional



De acordo com a Pesquisa Focus desta semana, a principal mudança de projeção foi a redução do IPCA 2012, que saiu de uma expectativa de 5,27% para 5,06%. No mais, tudo ficou praticamente estável com relação à última semana. IPCA para 2013 em 5,50%; crescimento econômico de 2012 e 2013 mantiveram-se estáveis em 3,20% e 4,20%, respectivamente; Selic para final de período também 9% e 10%. Para o câmbio, em 2012, o cenário também continua praticamente igual, em R$ 1,78 / US$, ante R$ 1,77 / US$, enquanto que para 2013, a cotação esperada permanece no mesmo patamar: R$ 1,80 / US$. 

O IGP-DI de março apresentou inflação de 0,56%m/m, um pouco acima da nossa expectativa (0,50%m/m). Com isso, a inflação acumulada em 12 meses totalizou 3,32% (3,38% em fevereiro). A recente alta dos preços dos produtos agropecuários e industriais, assim como os custos de serviços ao consumidor (como empregada doméstica e refeição em restaurantes), foram os principais responsáveis pela alta do índice no período. Para os próximos meses acreditamos que a inflação de alimentos deva manter-se neste patamar e até levemente abaixo, assim esperamos que o IGP-M de abril registre alta de 0,52%m/m

A inflação, medida pelo IPCA, apresentou alta de 0,21%m/m em março. Comparado ao IPCA de março de 2011 (0,79%), as principais contribuições para a desaceleração da inflação foi a deflação observada nos grupos de comunicação e vestuário. Deve-se considerar, também, a inflação reduzida para o grupo de transportes, motivada, principalmente, pela inflação do transporte urbano (0,4% vs 2,4% registrado em março de 2011), além do crescimento menos relevante nos preços de combustível (0,4% vs 2,7%). Outros itens também contribuíram para a desaceleração da inflação, como alimentação (0,25% vs 0,75%), serviços pessoais (0,55% vs 0,78%) e educação (0,54% vs 1,04%). Em comparação com a nossa previsão para o IPCA de 2012, as surpresas foram a deflação dos preços do vestuário, que apresentou comportamento divergente em relação ao padrão sazonal, e a baixa inflação de alimentação (apenas em linha com a inflação de alimentos registrada em 2009, quando ocorreu o colapso dos preços das commodities).
Apesar da inflação do etanol (1,88%) em março, ainda estamos esperando inflação reduzida nos preços do combustível (até uma deflação é possível) para este ano, devido, principalmente, à nossa hipótese de condições climáticas mais favoráveis a partir de abril de 2012. Acreditamos que os outros itens do grupo de transportes, especialmente a inflação de transporte urbano deve continuar abaixo do ano passado. Em relação ao preço de alimentos, estes devem registrar aceleração na inflação em abril. Em maio, no entanto, o grupo deve registrar inflação próxima a zero, com possível deflação, devido ao padrão sazonal. Esperamos que os administrados (no acumulado de 12 meses apresentam alta de 4,21% vs 5,58% registrado em Dezembro de 2011) e que os preços livres (em particular, o preço de bens duráveis) continuem a ajudar a manter o IPCA sob controle. Somando a isto a inflação controlada nos preços de alimentos, deve-se observar a convergência do IPCA até o terceiro trimestre de 2012.



Nos EUA, a criação de modesta de 120 mil vagas de emprego não-agrícolas decepcionou o mercado na sexta-feira (que esperava 205 mil vagas criadas). O dado representou exatamente a metade do total criado em fevereiro (240 mil), o que pode significar um ajuste após a alta criação de empregos nos últimos meses, contrária ao padrão sazonal. Entretanto, mesmo com o dado fraco de março, a média móvel de 3 meses continua em 212 mil empregos, o que deve continuar baixando a taxa de desemprego, assim como vimos também na sexta-feira (a taxa de desemprego passou de 8,3% em fevereiro para 8,2% em março).



O resultado abaixo do esperado para a produção industrial alemã de fevereiro criou um sentimento de cautela nos investidores internacionais. Dessa forma, os índices europeus encerraram o pregão sem tendência definida. Já no EUA, os dados de pedidos de auxílio-desemprego também tiveram desempenho decepcionante, influenciando as bolsas de forma negativa. Enquanto Dow Jones e S&P 500 tiveram baixas, Nasdaq obteve leve alta. No Brasil, após sessão bastante volátil, a bolsa teve alta discreta de 0,26%, aos 63.691 pontos. No mercado de câmbio, o dólar sofreu variação de -0,08%, cotado a R$1,8301/US$, enquanto no mercado de DI, diante dos resultados abaixo do esperado do IPCA, os juros futuros obtiveram queda, encerrando o pregão em 8,76%.

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quinta-feira, abril 05, 2012

Brazil (March IPCA): Inflation is no more - for now!

·         Mar12 IPCA: +0.21%m/m (Consensus: +0.37%m/m; Santander: +0.38%m/m, 12 months accumulated: 5.24%)

·         First thoughts: Comparing with the Mar/11 IPCA (0.79%m/m), the main contributions for inflation deceleration  were communication and apparel deflation and low inflation in transport, mainly due to the urban transport inflation (0.4% m/m vs 2.4% m/m posted in Mar/11) and fuel prices inflation (0.4% m/m vs 2.7% m/m). Other items also contributed for the inflation deceleration, such as foodstuff  (0.25% m/m vs 0.75% m/m), personal services (0.55% m/m vs  0.78% m/m)  and education inflation (0.54% m/m vs 1.04% m/m). Comparing with our forecast for IPCA Mar/12, surprises were deflation in apparel prices, which is out of the seasonal pattern for this period, and well behaved foodstuff inflation, which is also not in line with the pattern seasonal (only in line with foodstuff inflation registered in 2009, when the commodities prices had a collapse).

·         Bottom line: Despite the ethanol inflation (1.88% m/m) in March, we are still expecting low inflation in ethanol prices, maybe deflation, for this year, mainly because  our assumption of better weather conditions from April12 on. We believe that other transport items, mainly the urban transport inflation will continue being much lower than the last year. About foodstuff prices, they should post some inflation acceleration in April, however, from May on the foodstuff prices should register inflation close to zero  or deflation thanks to the seasonal pattern. We expect that regulated ( in 12 months accumulated is 4.21% vs 5.58% registered in Dec/11) and tradable prices (in particular, durable goods prices) continue helping to curb the IPCA headline, which summed to a well behaved foodstuff inflation should promote further inflation convergence up to 3Q12.


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quarta-feira, abril 04, 2012

LatAm Fixed Income & Economics Daily, Wednesday, April 4, 2012

LatAm Fixed Income & Economics Daily, Wednesday, April 4, 2012

Source: Santander

BRAZIL: DI curve steepens on Fed minutes and new measures for industry; strong IP helps support BRL

MEXICO: Rates decouple from UST: Banxico minutes overrule Fed minutes

CHILE: Inflation report confirms BCCh's more hawkish stance; however, it is mostly priced


BRAZIL: Industrial Policy: New Measures in "Plano Brasil Maior" — Overview and Consequences

CHILE: First Quarter Monetary Policy Report: Hikes on the Horizon

COLOMBIA: Banrep Releases Economic Report to Colombian Congress

MEXICO: Consumer Confidence Still Lacks Traction


Brazil: DI curve steepens on Fed minutes and new measures for industry; strong IP helps support BRL

Aside from the Fed minutes, the most important driver of local markets yesterday was the stronger-than-expected February industrial production figure (IP), which fueled expectations of a recovery in economic activity. The IP print came in at 1.3% sa m/m, more than double the 0.6% sa m/m consensus forecast. Although the BRL opened under pressure, testing the critical 1.836 threshold for a fourth time over the last month, sentiment changed as the strong IP number along with the new government measures helped support the BRL on the back of a better growth outlook.

The government announced several measures to support local industries worth a total of BRL65 billion, with incentives such as: (1) eliminating payroll taxes through 2013 (equivalent to about BRL12.1 billion); (2) a new capital injection from the Finance Ministry to BNDES (worth another BRL45 billion) in order to extend subsidized loan programs to December 2013; and (3) other less meaningful measures like tougher enforcement of trade rules and mechanisms to increase government purchases of locally-made products.

After the measures were announced, President Rousseff stated that she "… won't hesitate to do whatever needs to be done… [and] the government won't abandon Brazil's industry." She also pointed out that Brazil needs to increase the investment rate and that she would like to see lower interest rates and spreads in the banking industry. President Rousseff's last comments illustrate how important it is for the government to enable lower interest rates, which (the argument goes) should help support local industry (via lower financing costs and preventing further BRL appreciation) and eventually increase investment rates.

In the rates space, the IP number and the government measures had a relatively more muted impact than the one seen in the FX market, while the overwhelming driver was the release of the Fed minutes. As the document suggested that the Fed may not be willing to implement another round of QE via asset purchases (unless the economy loses momentum), UST rates sold off massively in a matter of just a few minutes. After the UST curve bear steepened (with tenors longer than 5Y widening a massive 10-12 bps), the DI curve followed with a similar move, with contracts maturing after 2015 widening 8-12 bps.

Our sense is that today's release of the March PMI services numbers as well as the weekly FX flows data may provide direction to the FX market. If the PMI print continues to show more positive momentum for the Brazilian economy (supported by looser monetary conditions), we should continue to see a more positive performance in the BRL, at least compared with LatAm peers, particularly the COP.

Mexico: Rates decouple from UST: Banxico minutes overrule Fed minutes

Local rates continued to move tighter on the back of market momentum after the dovish tone seen in the Banxico minutes, with the front end of both the MBono and TIIE curves moving to price in the possibility of a Banxico rate cut in the short term. This is quite a remarkable performance, given the massive sell-off seen in UST. The MBono curve ended up steepening, but much more modestly than its U.S. counterpart, with tenors longer than 4Y widening a modest 2-4 bps. The TIIE curve also saw widening in the 3-6 bp range in tenors longer than 4Y, with the front end starting to price in 70% of a 25-bp rate cut by the June meeting (assuming a binary scenario of either a 25-bp cut or no move).

The decoupling between local rates and UST has been even more impressive over the last eleven days, during which the UST curve has seen a massive bear steepening (front end widening 1-2 bps and long end selling-off 14 bps), while the MBono curve has actually bull steepened (front end rallying as much as 18 bps and long end tightening a more modest 4 bps).

Chile: Inflation report confirms BCCh's more hawkish stance; however, it is mostly priced

Rates markets moved higher today after the diffusion of the Central Bank of Chile's quarterly inflation report. The report showed large changes in BCCh's 2012 inflation and growth expectations (for full details, please see Chile Economics section). BCCh's expectation of December 2012 inflation expectations moved to 3.5% from 2.7% and their expectation for 2012 growth moved from a midpoint of 4.25% y/y to 4.5% y/y. In terms of monetary policy expectations, BCCh's base case for the likely level of the overnight policy rate in December 2012, as well as their expectations of the level of policy rates in 1 year time and 2 years' time all moved higher by 100 bps versus their last inflation report published in January.

In spite of the large changes to BCCh's base case, as communicated in the inflation report, the market was already trading largely in line with these levels after the publication of the minutes on Tuesday. The chart below shows the market's implied levels of policy rates. Implied inflation of 3.55% in December 2012 is also largely in line with the BCCh's view, however, their forecast for headline inflation to drop to 3% by December 2012 is certainly not in line with market pricing in which the 2y breakeven inflation trades around 3.6% and 1y1y breakeven inflation is around 3.77%. This seems to be a result of the fact that BCCh continues to see the increase in headline and core inflation more as a result of specific non-continuous factors rather than a structural phenomenon resulting from demand pressure and second round effects. In terms of the timing of hikes, the 100 bps of hikes priced over the next year are fairly evenly distributed with 50 bps of hikes in the first year and 50 bps of hikes in the second year. At current levels, we remain neutral on Chilean rates. We are looking for the pricing of more than 100 bps of hikes over the next 2 years in order to consider initiating receiver positions.




Industrial Policy: New Measures in "Plano Brasil Maior" — Overview and Consequences

As we have written in previous notes, industrial performance has been a major concern for the Brazilian government. Indeed, this sector has been the main reason for the modest GDP growth seen in the last year. The exchange rate has not only increased the competitiveness of imported products, but domestic production costs (especially unit labor costs) have been rising and it, in our view, has reduced the domestic product's capacity to compete in the market.

The government has tried to assist the industrial sector by (1) providing fiscal (and protectionist) measures in order to reduce production costs, (2) devaluing the currency and (3) protecting industry against highly competitive external sectors. Yesterday the government announced an update to the Plano Brasil Maior (Greater Brazil Plan), initially released in August 2011.

The industrial policy package announced is comprised of a series of initiatives, with a focus on temporary tax breaks for select sectors and greater availability of financing. In general, the measures can be divided into (i) tax cuts in labor intensive sectors (payroll tax relief); (ii) tax cuts for investments in infrastructure (PIS and Cofins); (iii) an increase in the control of imported goods; (iv) greater accountability in government purchases; (v) greater stimulus of export credits, and the most important, in our view (vi) the increase of resources to BNDES for the expansion of existing credit programs.

Most of the programs included in the plan are not new, and have only had their deadlines and sector targets extended and/or some increase in available funds. The sectors were selected because of their labor intensive nature and therefore these sectors are most likely to be affected in terms of competitiveness by a change in labor costs.

Overall, the government announced that this set of measures will reduce the additional cost of manufacturing by approximately R$54 billion (R$45 billion refers to BNDES) through end-2012 and approximately R$8.5 billion in the next 2-3 years, given the tax breaks implemented and/or extended in this round of measures (the measures are detailed in the table below). In the August announcement, the reduction was R$25 billion.

In our view, these measures added to easing monetary policy and gains of income, and, consequently, business confidence can help the industrial recovery from the second semester onward. However, these measures will likely not offset weak global demand and, in particular, it will likely not cause a decrease in current high unit labor costs. In sum, we believe that the measures provide some limited relief to select sectors but do not change materially the competitiveness problem of the Brazilian manufacturing sector.

Given the above, February industrial production posted an increase of 1.3% m/m, significantly above both our expectation (-0.3% m/m) and the market consensus (0.5% m/m). The previous result showed a decrease of 1.5% m/m. The increase registered this month was widespread, affecting 18 of the 27 industrial sectors. But we highlight the vehicles and extractive industries, which showed recovery in response to intense losses observed in January (in terms of categories, the recovery was concentrated in capital and intermediary goods production). The rise in intermediary goods surprised us, given the current level of concern about the industrial sector.

Nevertheless, the trend measure (which can be the 3-month rolling average) is still running at a low pace, growing only 0.1% m/m in February. So, we maintain our forecast of 2.0% industrial growth in 2012, below that of the total forecast GDP growth of 3.5%.



First Quarter Monetary Policy Report: Hikes on the Horizon

The Central Bank released its quarterly Monetary Policy Report (IPoM). The Central Bank of Chile published its quarterly Monetary Policy Report (IPoM), in which it updated its baseline scenario to the upside, as we were expecting. We believe the arguments presented in the report were quite similar to the minutes from those of the last monetary policy meeting published last Friday, thus it did not differ with market expectations. For the current year, the BCCh expects GDP to grow 4/5% (vs 3.75/4.75% in December), mainly due to a more benign external scenario and higher-than-expected growth in 4Q2011 and 1Q2011; they also corrected their year-end inflation forecast from 2.7% (headline) and 2.6% (core) to 3.5% and 3.3%, respectively, mostly due to higher food and oil prices. With respect to monetary policy and in contrast to the previous IPoM (where the BCCh was expecting a year-end stance rate of 4%/4.25%), on this occasion, the BCCh considers in its baseline scenario a monetary policy rate similar to market prices (one or two hikes in 2012), and not to economic surveys, which expect a maintainance in the reference rate of 5%. It is also important to note that the BCCh considers that the appreciation of the CLP/USD has been similar to other commodity exporting countries and the current real exchange rate is consistent with these fundamentals.

Local activity and demand has surprised on the upside, but some risks remain. According to the Chilean Central Bank, after losing dynamism in the third and the beginning of fourth quarter 2011, the economy has gained strength in the rest of the year, surprising on the upside compared with what the BCCh was expecting in December's IPoM. Thus, the 2012 GDP growth estimate range was corrected by +25 bps to 4%/5%, where the main reasons behind this decision were the surprise in previous data, and the external scenario has been less adverse than anticipated. In the baseline scenario, the BCCh expects internal demand, which is currently growing at an elevated pace, to trend down closer to tendency growth rates in the upcoming quarters because of moderation of the impulse coming from its fundamentals (labor market and financial conditions). The main risk for this baseline scenario comes from the external scenario, especially a new financial crisis in Europe and a faster deceleration in growth in China.

2012 inflation estimate was corrected from 2.7% to 3.5%. In the last few months, the CPI has remained above the BCCh's inflation target, while core inflation has converged to 3%, which is faster than previously anticipated. According to the BCCh, the normalization in core inflation is coherent with the economic dynamism, a tight labor market, the depreciation of the CLP in the second half of the year and lagged transfers from international food and oil prices. In this sense, the baseline scenario for inflation was corrected to the upside from 2.7% to 3.5% for the headline and from 2.6% to 3.3% for the core CPI. Also, according to the BCCh's view, inflation should remain above 4% until the second semester, converging to 3.5% by the end of the year and reaching 3% in 2013, while core CPI will most probably converge to 3% slower than the headline. We maintain our call of 2012 year-end inflation at 3.7% and also believe that more than some specific increases, inflation reflects demand pressures, where 70% of the CPI basket shows maintenance or an increase in prices, compared with an average of 60% in the previous months. If core inflation pressures continue growing (as has been the case in the previous three months), we could hike our inflation estimate for this year from 3.7% to 3.9%.

BCCh uses as a working assumption between one or two hikes for the reference rate. The BCCh changed its expected path for the monetary policy rate from its last IPoM, where it was expecting a 2012 year-end reference rate between 4%/4.25% and almost all risk scenarios pointed to the downside. In this report, the inflation projections are supported by a path for the monetary policy rate, which is consistent with financial prices, which contemplates one or two hikes of 25 bps from the current level (5.0%). Despite this baseline scenario, the BCCh considers that there are still some risks that could lead to the necessity of a different path, where a faster deceleration of China or new problems in Europe could imply lower rates, while the increase in oil prices because of geopolitical problems (Iran) and a higher dynamism of economic activity (especially internal demand) could mean more pronounced monetary policy rate hikes. We expect the BCCh to maintain the reference rate at its current level in the near term, changing to a more hawkish bias, if the baselines scenario continues to be valid, and increasing the reference rate twice by 25 bps during this year.



Banrep Releases Economic Report to Colombian Congress

Banrep released its economic report to the Colombian Congress, explaining the latest economic outlook in local and external contexts, pointing out the recent developments in inflation, its expectations and the economic activity. They referred to an expected economic growth in 2012 that was relatively high, which was revised to around 5.0% and would be the consequence of still strong domestic consumption. They highlighted the high levels of capacity utilization, suggesting that the economic growth settles over potential GDP, as 2011 saw cumulative economic growth of 5.9%; and the fact that consumption would be the key factor behind economic dynamism. As a result, the Central Bank has made adjustments to the interest rate in order to contain the increase in the local credit portfolios, which still maintain high growth rates.

Another aspect is the gain obtained from economic growth due to the improvement in the labor market, which hit an unemployment rate of 11.9%, whereas in the same period last year it was 12.9%. Simultaneously, the employed population increased, which acts as a credible reason supporting the recent economic dynamism. The labor market outperformance also contributed toward boosting consumption and internal demand, which mitigated the adverse external context contrasted. But it was not only consumption, but also investment that grew 16.6% during 2011.

Starting in 2012, the PCI variation has corrected and returned to better levels, hitting 3.55% YoY in February, in spite of higher combustible prices. Two items made the difference in the general level of prices — the reduction of the food prices given the end of the rainy season, as well as the tradable goods prices, which have also followed downward trends thanks to a lower exchange rate. Recall that Banrep has made successive adjustments to the interest rate, which would have had positive effects in terms of containing inflation. In addition, the PPI also set in at lower-than-expected levels, suggesting lower effects on the CPI.

The risks of higher inflation are linked to: the potential continuity of high levels of commodity prices; the growth of local credit portfolios (which also boosts consumption); and a minimum wage growth of 5.8%, which impacted the inflation of 2011 of 3.7%. Nevertheless, the Central Bank states that there is a high probability to end 2012 with an overall inflation within the inflation target range of 2.0% - 4.0%.



Consumer Confidence Still Lacks Traction

According to the joint INEGI-Banxico Index, consumer confidence in March remained practically unchanged from the previous month. Consumer confidence is now at 93.4 on a non-seasonally adjusted basis, a gain of 1.9% with respect to the same month of 2011 but a slight decrease from February, when the Index stood at 93.6.

Considering the lukewarm recovery in employment, and a stable outlook for the Mexican currency, the backdrop for private consumption remained relatively unchanged in the third month of the year. Furthermore, the current conditions index retreated 1.2% from February, and the future conditions index declined 1.3% also on a sequential basis.

However, it is worth mentioning that there is significant room for improvement as the Index remains well below the maximum levels observed in the pre-Lehman years.

Consumers remain cautious on the back of stagnation in wages, a fragile global outlook and the slow recovery in employment.

While private consumption has recovered on the back of improvements in credit conditions, stable inflation and a stronger peso, the lack of recovery in wages and the excess labor supply continue to weigh in considerably among the Mexican population.

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