Morning Note /

Latam Daily: Economies returning to pre-COVID levels, but recoveries are uneven

  • Brazil, Mexico and Colombian markets return from long weekend

  • Chilean COVID cases surging ahead of elections

  • Peru’s economy returns to pre-pandemic output levels

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

Daron Hendricks
Danny Greeff
Kieran Siney
ETM Analytics
16 November 2021
Published by

Talking Points: Busy day ahead in terms of data releases

Brazil: Brazil returns to trade today after enjoying a long weekend on account of Proclamation of the Republic Day. Looking at the local calendar, it is set to be a busy day ahead for local markets with a number of potentially market-moving data prints scheduled for release. Most notably is the BCB’s September economic activity report, which is widely used as a proxy for GDP. Consensus expectations suggest that economic activity contracted for a second straight month in September with analysts polled by Bloomberg pencilling in a decline of -0.3% m/m in September. Recall that data released earlier in the month showed that industrial production declined -0.4%, broad retail sales contracted by -1.1%, and services activity fell by -0.6%. On an annual basis, the pace of economic growth is expected to decelerate from 4.74% y/y in August to 1.60% y/y in September. If confirmed by the actual print, it would suggest that GDP growth was stable in Q3 and around 3.5% higher than levels seen a year ago. Going forward, while lawmakers are likely to approve President Bolsonaro’s new social program, which will provide BRL 400 per month to around 17 million low-income families, the economic outlook remains fragile, especially as inflation continues to surge and interest rates continue to rise sharply.

As was the case last week, politics will remain in the spotlight this week. Investors will continue to keep close tabs on the proposed constitutional amendment to the fiscal rule in the Senate. It is widely expected that the bill will receive far more resistance in the Senate than it did in the Lower House. Given the fiscal impact of the bill, investors will continue to monitor developments on this front closely..

Mexico: Data published on Friday showed that the Mexican economy created 172.7k jobs in October, increasing 0.84% m/m from September figures. This is the highest level of formal jobs created since November 2019, after ten consecutive monthly increases and the first time that two consecutive months have created more than 170 jobs. The increase was driven by the transport and communications sectors, construction and social and communal services. Meanwhile, employment in business services declined during the month.

Ahead of the long weekend, the Chamber of Deputies approved the 2022 spending budget without any modifications to proposals. An official statement released on Sunday showed that 2022’s total net expenditure of MXN7.08bn was endorsed with 273 votes in favour, 214 against and zero abstentions. The total amount represents an increase of 8.6% to what was approved for 2021 and foresees a budget deficit of MXN875bn.

Colombia: As traders return from the Colombian long weekend today, they will be greeted by Q3 GDP data which are expected to show a 12.4% y/y and 5.0% q/q expansion of the Colombian economy. If realized, this would mean Colombia’s economy is back above pre-pandemic levels of output for the first time since the COVID-19 outbreak. Economic activity would remain below potential, however, although the negative output gap is narrowing at a rapid pace. Underlying details should show that services, construction, household consumption, and manufacturing rebounded strongly after the drop in Q2, with mining expected to decline slightly despite high commodity prices.

Chile: Going into the presidential elections this weekend, the health minister Enrique Paris has reported that the country has its highest amount of active COVID-19 cases in four months. “I ask all people to get tested, even if they do not have symptoms, remember that, for example, today 27% of confirmed cases are asymptomatic. In case of presenting symptoms, it is vital that they attend a health center within 24 hours after the test and isolate themselves until they obtain the result of their exam, only in this way will they protect their loved ones and not put citizens at risk,” Paris insisted.

There are fears building that the health authorities may adopt a harder line over the December holiday period as they were criticised for being overly lenient over the December 2020 festive period and may not want to be in the firing line again.

Peru: Data out yesterday showed that Peru's economy expanded by 9.70% y/y in September, taking overall activity levels back above pre-pandemic levels. The reading implies that the economy expanded by 11.5% y/y in Q3, but this recovery remains uneven with services and mining lagging the construction and retail sectors. On a q/q basis, we should see the economy having grown by 3.00% in Q3, a strong recovery from the lack of growth seen in Q2. Despite rising to above pre-pandemic levels, output is still below potential and further gains will be more difficult to come by as the low-hanging fruit has now been mostly picked. This means that the output gap will remain and allow the central bank to maintain some monetary stimulus, even though they have reduced this notably in recent months.

The unemployment figures were also positive, showing an improvement in the jobless rate to 9.60% from 10.00% for October. Details, however, show that this is also an uneven recovery, with the underemployment rate rising to 42.8% from 41.9% prior. The high underemployment rate means that wage pressures should remain relatively benign, helping contain inflation once we see the impacts of external factors start to fade over the coming months and transfers to consumers come to an end..

Forex: Stronger USD pressuring Latam FX but liquidity will return today

Brazil: Yesterday the USD traded to its strongest levels since July 2020. The much stronger than expected manufacturing data out of NY did the trick as investors positioned for the Fed normalising monetary policy faster than its developed market peers. Although risk aversion remains subdued, the USD is still enjoying a relative trade benefit that could extend a little while longer given the reluctance of other developed market central banks to embark on their policy normalisation process. As inflationary type data out of the US strengthens, the USD may initially enjoy further support, but that could be temporary. If inflation cools next year and the need to lift rates abates, the USD will find itself very fully priced and susceptible to bouts of correction. Given expectations for more rate hikes in Brazil, this may help drive a recovery for the BRL next year, if the political situation does not detract further from the currency’s appeal.

Mexico: The USD-MXN regained its footing at the start of the week due to the USD hitting 2021 highs amid thin liquidity conditions, with the local and several other financial markets in the region shut for a public holiday yesterday. The pair settled at 20.6252 after finishing last week on the back foot at 20.5187. As previously cautioned, the underlying bias for the USD-MXN remains firmly to the upside. Heading into the US Open, the USD-MXN has inched slightly lower to the 20.600 mark as the USD recedes from its highs with the looming US retail sales data, with investors wary of a strong reading could stoke inflation and add pressure on the Federal Reserve to hike rates. This, of course, would drive the pair back towards November highs around the 21.00-handle.

Colombia: Following a 0.15% decline last week, the COP Will be playing catchup today after the Colombian long weekend. The market will need to navigate some big economic data releases from out of the US, while simultaneously positioning for Q3 GDP numbers scheduled for release out of Colombia today. Technically, the 3900/$ mark remains a strong point of support for the COP, while a strong recovery from this month’s losses appears unlikely unless the USD loses its shine in the near term.

Chile: The local unit bucked the trend and finished the session below the 800 handle which is something we did not expect to be honest. Copper was off and there is inherent event risks over the next couple of weeks, both on the data and poltical front. 800 is now the pivot as we enter the start of the Tuesday morning session.

Peru: The USD-PEN dropped fairly sharply yesterday, breaking below the 4.000 handle as the PEN tracked the CLP's gains despite the increase in political uncertainty on the local front amid the resignation of the country's defense minister and Congress being asked to change the economic chapter of the constitution. The drop below 4.000 for the pair, therefore, is unlikely to be sustained over the coming sessions, especially given the surging USD and rising developed-market bond yields.

Fixed Income: Brazil comes to the market with linkers

Brazil: While Brazilian markets were closed yesterday, it is worth noting that with inflation risks skewed firmly to the topside amid persistent currency weakness, heightened political and fiscal uncertainty and buoyant commodity prices, we expect the broader flattening bias in the curve to remain entrenched in the months ahead. Note that the flattening bias has been so robust that the Brazilian bond curve has inverted for the first time since 2016, as expectations for further rate hikes prop up yields on the front end of the curve while mounting growth concerns drive down yields on the long end.

In the primary market, National Treasury is set to come to market with a slate including inflation-linked NTN-B bonds maturing in 2026, 2030 and 2055. We expect demand for inflation protection to remain robust.

Mexico: The domestic bond market was shuttered yesterday for a public holiday. With inflation remaining the focal point for markets and investors alike, another spike in readings in the coming months could prove bad news for Mexican and global bond markets. Break-even rates of the 5yr and 10yr tenors, trading at 4.26% and 4.58%, respectively, have eased off their recent highs but remain above the central bank’s preferred interest rate target of 3%, plus or minus 1 percentage point and are likely to remain elevated above the target in the short term. By extension, this will continue to place pressure on Banxico to extend its gradual tightening.

Colombia: Colombian bonds came under some strong selling pressure on Friday, with yields rising across the curve through the session as investors continued to cut risk exposure in the wake of last Wednesday's US CPI scare. With this move, the Colombian yield curve ended the week somewhat higher and steeper than what it started, likely reflecting a decline in foreign demand. The move illustrates the risks facing Colombian assets in a context of tightening financing conditions abroad, especially given the country’s fiscal deterioration through the pandemic.

Chile: The front end of the curve remained offered with the 2023 bond finishing some 10 bpts higher versus Friday’s closing levels at 5.30%, according to the Tradition closing run last night. 2030’s were also around 10 bpts higher on the day, while 2035s finished the session around 4 bpts higher leading to mild flattening. The broader paying interest is justified given the political, fiscal and monetary tightening risks that the market is currently experiencing, keep with the trend for now.

Peru: The flattening bias along the sovereign yield curve remained entrenched yesterday, with yields sliding across the board with more pronounced moves at the long end of the curve. The front-end remained anchored given the outlook for rates, while some risk-on trading and a rallying local currency supported the longer-dated tenors. How much further these tenors can rally is starting to be questioned, especially given the political and economic risks that the country still faces.