Talking Points: Colombia hiked 100bp to keep hawkish bias entrenched
Brazil: More upbeat fiscal data was published on Friday. Data published by National Treasury showed that the central government recorded a primary budget surplus of BRL 13.8bn in December, more than the BRL 10.6bn forecast by economists and BRL 3.9bn in November. The December data meant that Brazil recorded a central government primary budget deficit of BRL 35.1bn in 2021, equivalent to 0.4% of GDP. Note that this is the best central government budget reading in more than 5 years and far better than 10% of GDP in 2020.
Economy Minister Guedes said the improved deficit result for 2021 was due to the recovery of the economy and the government's control over spending, and not inflation as some economists have suggested. Treasury meanwhile said, “still carrying out policies to combat its economic and social effects, the government managed to practically rebalance its budget, promoting a fiscal adjustment greater than 9 percentage points of GDP.” Notwithstanding renewed waves of the pandemic last year, government spending decreased by 23.6% in real terms, driven in part by the reduction in cash handouts to the poor. The better than expected fiscal data will undoubtedly help quell fiscal fears, which has risen sharply in recent months ahead of this year’s presidential election
The start of the new week brings with it more fiscal and employment data, both of which have the potential to provide some fresh directional impetus for domestic markets. Also of interest is the BCB’s weekly Focus survey which will provide investors with the latest forecast for GDP, inflation, FX and interest rates. Recall that economists raised their 2022 year-end inflation forecast to 5.15% from 5.09% previously in last week’s Focus survey
Mexico: Mexico’s public finances remained under strain in the final month of 2021, registering a year-to-date budget deficit of MXN757.8bn to end the year with a primary deficit of negative 0.3% of GDP. Though budget revenue was exceeded by public expenditure to stimulate economic growth, the government reduced its debt. The primary balance observed at the end of 2021 is lower than the forecast of negative 0.5% of GDP but fell short of the Treasury’s original plan of ending the year with a balance of 0.0% of GDP. Specifically, public sector revenue amounted to MXN5,960bn in 2021, a growth of 5.6% y/y – the most substantial increase in the last five years. The increased revenue stemmed from higher oil and tax revenue than estimated. On the other hand, net spending for 2021 totalled MXN6.738bn, which implied additional spending of MXN482mn than planned. This marks a growth of 6.4% y/y - the highest increase since 2008, owing to economic support and increased spending of state-owned companies, such as Pemex and CFE. According to remarks by Deputy Finance Minister Gabriel Yorio, the additional expenditure beyond the 2021 budget went to infrastructure, security and the response to the coronavirus pandemic. Mexico’s delayed spending, compared to other Latin American countries, will support growth going forward. However, there will still need to be signs that the government is implementing fiscal consolidation measures to ensure that the country remains on a path of sustainability required to lure back investors.
Investors this week have a deluge of month-end economic data to look forward to. Kicking things off is Q4’s preliminary GDP figures together with net outstanding loans. Concerning the former, today’s economic growth reading is widely expected to show that Latin America’s second-biggest economy slipped into a recession in Q4. The services sector should represent most of the q/q decline, owing to the government’s outsourcing reform. Meanwhile, abating tailwinds from fewer infections and lockdowns would have prevented a steeper decline. The industrial sector may be more or less flat on a q/q basis due to the drag of supply shortages, high commodity prices and other headwinds such as the government’s tight fiscal policy and nationalist rhetoric
Colombia: BanRep announced a 100bp rate hike at its first meeting for 2022, adding to the 125bps worth of rate hikes at the back-end of last year to take the benchmark overnight rate up to 4.00%. While the decision was split, with two members voting for a 75bp hike, it still signalled growing concern over red-hot inflationary pressures. The bank's updated forecasts of upside risks to inflation, downside risks to growth, and a wider current account deficit in the face of tightening global financing conditions pointed to more aggressive rate hikes in the months ahead, although it said uncertainty was high and that future decisions would depend on new information. Aggressive monetary tightening nevertheless appears the most likely outcome for the months ahead, with the current ex-ante real rate of 0.0% still well below the real neutral rate of 1.50%, to suggest monetary conditions are highly accommodative at present.
Chile: It is going to be a busy start to the week with all of the end of the month economic data slated for release today. We have a combination of consumer and producer data which provides a broad view into the state of the Chilean economy.
On the consumer side we have the unemployment rate and retail sales figures for December. Unemployment is expected to have slipped further with 7.2% pencilled in by economists versus 7.5% at the November print. Retail sales is expected to show strong private consumption for the Christmas month with 20.5% NSA year on year predicted. There remains legacy capacity as a result of the pension fund withdrawals and government transfers, however this is likely to pare back sharply as the effects of a hawkish monetary policy take hold.
Industrial Production for December should come in at 2.3% which is a marginal decline from the 2.5% recorded in November. There has been a loss of momentum recorded in the second half of 2021 but Industrial Production is still above pre-pandemic levels.
Peru: Peru's Interior Minister Avelino Guillen has tendered his resignation. Guillen's resignation comes as President Castillo failed to support him in a dispute that he had had with Police Chief Javier Gallardo over the promotion of senior police officials. The resignation is the third for an interior minister since Castillo took office. The resignation, although not a major factor for policy, does show that Castillo's cabinet is still very fragile, highlighting the fact that political issues remain even though we have seen investors price out a lot of political noise in recent weeks.
Forex: Latam FX may kick off the new week on the front foot
Brazil: The BRL was once again amongst the top-performing emerging market currencies on Friday. Specifically, the BRL was the second-best performing EM currency on the day, gaining 0.53% against the USD to end the session at 5.3818. Underpinning the outperformance of the BRL relative to its EM peers was the combination of better than expected fiscal and economic data and expectations for the BCB to continue hiking rates aggressively until inflation is brought back under control.
Building on the carry attractiveness comment above, according to Bloomberg data, bearish bets on Brazilian assets held by local investors are getting crushed by the significant improvement in foreign sentiment towards Brazil. Foreigners are piling into Brazilian assets to take advantage of the attractive carry trade and undervaluation in domestic markets. Over the past three weeks, foreigners have injected $9.2bn into derivatives betting on the BRL. This has taken the overall position on the BRL to the most bullish in almost 4 years. While there are a number of downside risks facing Brazilian assets, we expect the inflow of foreign funds into domestic assets to persist in the months ahead. This should continue to provide support for the BRL going forward.
Mexico: The USD-MXN extended its advance in the week’s final session, rallying past the 50DMA resistance to 20.9141 – a new one month high. The pair was on course for its worst week in two months before it retreated slightly to close at 20.8051. Sustained USD strength could prompt the pair to revisit the key 21.000-handle, which coincides with the 32.8% Fibo retracement level. Though the pair has drifted lower in pre-market trading this morning, there are several key events this week, domestically and abroad, starting with today’s Q4 GDP reading, which may support a USD-MXN bullish bias.
Colombia: The COP looks set for a strong start to the new week, as Friday's larger-than-expected post-session rate hike will need to be priced in today, while broader trading conditions are also looking tentatively risk-positive. Additionally, oil markets remain on a tear, and may provide the COP with some added topside impetus in the near term. The bulls may therefore look to break through last week's highs, and potentially even test the currency's 100-session moving average around 3900/$ in the near term.
Chile: A weak copper price and rampant dollar put CLP bulls to the sword into the close of the week. The pair closed above the 810 handle and technical analysis suggests that we could be in for another leg higher and thus buying the dips is the favoured play for now.
Peru: The USD-PEN climbed back above the 3.85000 level on Friday, as commodity price weakness filtered through to the local unit. We have been trading around this level for some time now and the pair is looking ready for a break away from this trading range. Technically, the bias is looking a little more topside focused but we are seeing global risk aversion levels subside and the markets adjust to the new outlook for the Fed. We could, therefore, see the pair resume its downtrend that we saw in the first two weeks of the year.
Fixed Income: Flattening pressures expected to persist
Brazil: Notwithstanding the better than expected budget data, Brazilian bonds came under some modest selling pressure on Friday as the combination of external headwinds and mounting inflation fears weighed. For context, the 2yr and 10yr bond yields rose by 3bps and 9bps to 11.92% and 11.47%, respectively. From a carry trade perspective, the shift higher in bond yields on Friday once again highlighted the attractiveness of the BRL to carry traders. According to ETM’s carry attractiveness model, the BRL ranks second highest out of the 22 currency sample. The model takes into consideration a country’s real interest rates, currency valuation on a PPP basis, current account viability, terms of trade and implied deposit rate adjusted for volatility. Out of a possible 10, the BRL scores 5.8 in terms of carry attractiveness. Much of this is due to the country’s attractive yields and the significant undervaluation in the currency.
Mexico: Mexican bond yields fell across the curve on Friday, down 7bps in some cases, tracking the decline in UST yields. Over the week, however, the curve flattened as investors responded to the normalisation of US monetary policy. Given the widening budget deficit and the potential for build-up in the debt/GDP ratio, Mexico's fiscal position will limit the degree to which MXN bond yields can drop. Furthermore, a shrinking tax base leaves the economy vulnerable if a corrective fiscal reform response is not implemented. Today’s GDP figures may heighten concerns about Mexico’s economic growth outlook, weighing on long-term bond yields. This may drive a flattening bias in the curve and increase risks associated with Mexican bonds. Currently, the 5yr USD CDS spread is trading at 107bps, off its 2021 peaks of around 120bps.
Colombia: Bucking the broader steepening trend seen through most of January, the Colombian yield curve flattened slightly into the weekend as investors priced in BanRep's larger-than-expected rate hike and more hawkish policy trajectory. Moves of over 8bps occurred at the very front-end of the curve, with the 2-year yield testing levels last seen at the onset of the COVID-19 pandemic. Broadly speaking, topside pressure at the front-end is expected to persist for a while longer, while the long-end may also struggle to retrace its recent rise due to political uncertainty ahead of the upcoming congressional and presidential elections. Accordingly, the Colombian bond market may remain under pressure in the near term, although its selloff is looking increasingly stretched and may need a new catalyst to provide fresh directional impetus.
Chile: As we enter the start of the week it's potentially worth pulling back the lens and taking a look at the bond curve at the end of December 2021 versus the current rates. Understandably there has been significant paying interest on the front end of the curve as the BCCH hiked rates and reinforced its hawkish outlook for 2022 in terms of monetary policy. The short dated 2024 bond has risen by just short of 70 bpts over the month while the longer dated 2030 has shed just short of 30 bpts which has entrenched the bearish flattening narrative.
Looking ahead we expect some moderation in the bearish flattening seen of late and we could potentially consolidate the current curve shape at least until this week’s data is out of the way and traders and investors alike can reassess the inputs.
Peru: The local yield curve was subjected to some flattening pressure on Friday, although the moves remained fairly marginal. The 2023 tenor, for instance, saw its yield increase by just 2bp. The 10v2 spread, therefore, held above the 200bp mark where it has been since November, showing no signs of a breakout from the current range. Given the rates outlook and expectations that economic activity levels could slow going forward, we could see some flattening pressures re-exert themselves over the coming months, which could take the spread back down to lows not seen since before the pandemic. Tomorrow's CPI Data, therefore, will be eyed closely
