Morning Note /

Latam Daily: Fading expansion in Chile could prompt more stimulus calls

  • Talking Points: Uncertainty still surrounds AMLO’s nominee for Banxico head

  • Forex: Focus still on Omicron, but weaker USD will offer support

  • Fixed Income: Brazil to auction bonds, Peru short-term debt may weaken

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

Daron Hendricks
Danny Greeff
Kieran Siney
ETM Analytics
2 December 2021
Published byETM Analytics

Talking Points: Uncertainty still surrounds AMLO’s nominee for Banxico head

Brazil: It is another busy day ahead in terms of economic data. Brazil’s economic calendar is headlined by the Q3 GDP report. Consensus expectations suggest that growth in economic activity was unchanged on a quarter-on-quarter basis in Q3. Note that if the Q3 GDP reading surprises the downside and economic activity contracts, it will trigger a technical recession. Recall that the central bank’s economic activity gauge, which is widely viewed as a proxy for GDP, suggests that Brazil did indeed slip into a technical recession in Q3 as the combination of persistent supply chain challenges, soaring inflation and higher interest rates weighed on economic activity. The services sector is expected to have performed relatively well in Q3 as restrictions were eased. The retail and industrial sectors meanwhile fared poorly in Q3 according to sectoral data which has already been published. On an annual basis, GDP growth is seen slowing from 12.4% y/y in Q2 to 4.3% y/y in Q3.

On the fiscal front, the Senate has delayed from Wednesday to Thursday the vote on the precatorios bill that would amend the constitutional spending cap to allow for more welfare spending, according to Reuters. The postponement, which was announced by Senate President Rodrigo Pacheco, means the Senate will attempt to take up that bill, on the same day as the vote on the new social program known as Auxilio Brasil. The government intends to approve the measures for the first welfare payments to arrive before Christmas. We expect the bills to be passed in Senate today

Mexico: There were several major developments yesterday. One of particular interest was Banxico’s nominee Victoria Rodriguez’s appearance in the Senate as part of the process to be ratified. Banxico’s governor, Alejandro Diaz de Leon and the Deputy governors Irene Espinosa and Galia Borja, issued their comments after presenting the quarterly report on the evolution of inflation in the country, the last public event of Diaz de Leon, who has a month left in office. According to Bloomberg reports, the three board members avoided talking about Rodriguez’s career. Instead, they focused on the process of ratification per the Constitution and the central bank's law. This is due to concerns that Mexican President Lopez Obrador might be taking an opportunity to grab at the independence of one of the few Mexican institutions that have remained isolated from his controlling political authority.

The closely watched Q3 Quarterly Inflation Report, published yesterday, reported some modest updates to its outlook. Banxico lowered its economic growth forecast to 5.4% from 6.2% previously for 2021, citing a contraction in activity in Q3, partly due to a bigger-than-anticipated slowdown in services, which can be associated with a worsening of the Covid-19 pandemic. Additionally, the negative impact of the shortage of semiconductors on the auto industry and changes in labour laws that prohibit the outsourcing of staff also contributed to the drop. The Mexican economy is forecasted to grow by 3.2% in 2022, slightly above the previous estimate of 3%. The central bank confirmed its higher inflation estimates for 2021 and 2022, which was updated in its last monetary policy meeting held on Nov. 11. Consumer price inflation is expected to average 6.8% in Q4 and gradually slow toward the bank's 3% target in 2022 and 2023.

Colombia: The Davivienda Colombia manufacturing PMI increased marginally in November, moving deeper into expansionary territory as the manufacturing sector continued to grow in Q4. Specifically, the index rose from 54.0 to 54.9 in November, with employment growth, stocks of purchases, and supplier delivery times underpinning this increase. However, output growth decelerated through the month, owing to container shortages and raw material scarcity that also led to increased price pressures. Sales growth nevertheless remained healthy due to strong demand, but concerns over inflation are rising. This was all consistent with the general improvement of the Colombian economy, as well as broader risks that price pressures may increasingly weigh on the performance of the economy in the coming months.

There were also current account stats for Q3 released yesterday, which showed Colombia's deficit widened from $4.296bn to $5.120bn. This figure is concerningly high when compared to historic norms, and explains some of the COP's depreciation through the quarter. The widening of the current account deficit likely reflects improving domestic demand that will have weighed on the trade balance, as well as tightening monetary conditions abroad that are driving a rotation away from risk in the financial markets.

Chile: Chile’s economic activity came in at the market expectation printing 15% year on year. The economic dynamism may be topping out given that the previous month recorded 15.7% as the effects from all the stimulus begins to fade. This may prompt those looking for an additional boost to campaign for more stimulus and more access to their pension fund pots however this is unlikely to yield the boost expected and will undoubtedly damage the broader economy even more than the previous withdrawals have caused long term systemic issues.

The news vendors are focusing almost squarely on the developments surrounding the new COVID-19 variant named Omicron. If there is a mistake people are making, it might be in assuming that the Omicron variant is a bad enhancement of the virus. If it turns out to be highly transmissible but far less dangerous, it may result in an enormous global rally in financial markets and could signal the beginning of the end of the pandemic. The globe must learn to live with the virus, and the virus needs to weaken to co-exist with its host. However, until scientists complete their studies to learn whether current vaccines will effectively prevent severe illness and gather insight into the severity of the illness caused by Omicron, financial markets will remain on high alert..

Peru: The CPI data released yesterday showed that headline inflation in Peru moderated marginally in November, coming in at 5.66% y/y from 5.83% in October. The moderation in the headline figure wasn't replicated when looking at the core numbers, which continued their upward trend. Core inflation came in at 2.91% y/y, a level not seen since early 2017. This suggests that underlying price pressures remain worrying, evidenced by rising administrated cost inflation, greater services inflation, and higher goods inflation. This all suggests that the weaker headline figure will provide very little relief, with further declines looking likely over the next few months. This will keep the central bank on alert and suggests that we could see a few more rate hikes coming into the end of H1 next year.

Forex: Focus still on Omicron, but weaker USD will offer support

Brazil: The BRL suffered a hard blow to the jaw on Wednesday as the combination of weak economic data and concerns over the detection of the Omicron variant weighed. The BRL was the second worst-performing emerging market currency on the day, losing -1.10% against the USD to end the session at a 1-month high of 5.5808, according to Bloomberg data. It is expected to be another volatile day of trade for the BRL today as markets digest the Q3 GDP print and outcome of the Senate vote.

Mexico: The MXN advanced for a third straight session yesterday, a turnaround from last week with the local currency outperforming its Latam peers so far this week and on course to challenge the 21.000/USD mark. The MXN closed yesterday at 21.5099 after receiving support from a weak greenback and a rebound in commodity prices. However, the less than optimistic growth outlook and concerns over the central bank's leadership and autonomy kept its gains in check. Besides today’s non-moving data card, the economic calendar is empty heading into the weekend, leaving the MXN vulnerable to offshore events and headlines around the Omicron coronavirus strain.

Colombia: The COP was unable to hold onto gains made during early-session trade on Wednesday, as it closed the day 0.25% weaker following a shift in market sentiment around midway through the session. It was up around 60% at one point, but retreated rapidly into the end of the day as investors turned more cautious given all the uncertainty surrounding Omicron. Market fears over COVID-19 and how its resurgence could affect future central bank policymaking are the main drivers of global capital flows at present, and will continue to be until more information on the new Omicron variant emerges.

Chile: It was certainly a whippy day for the peso yesterday as it briefly broke below the 820 mark before bouncing to close at the high of the day namely 838.80. 840 provides the first resistance level and we expect that this level will not provide much of a hinderance and thus advocate adding to longs on any dips.

Peru: The USD-PEN continued to climb yesterday, closing the session around the 4.070 level. The PEN remains considerably less volatile than many of its regional peers, and we expect this to remain a theme over the near term. There will be some focus on the potential impeachment of President Castillo alongside other political risks, which will keep trading volumes fairly low until more certainty is found. A weaker USD, however, will cap any significant surges for the pair for now, although it should be noted that there are very technical levels between the current price and the record high for the pair.

Fixed Income: Brazil to auction bonds, Peru short-term debt may weaken

Brazil: The appeal of bonds has improved this week, with bonds yields across the globe falling in recent sessions as concern about the impact of the Omicron coronavirus variant spurred a fresh bout of risk aversion among traders. Adding to the tailwinds for bonds has been a significant pullback in inflation expectations, partly due to the collapse in international oil prices, which has been one of the main contributors to global inflation this year. Longer-dated US Treasuries, in particular, have performed exceptionally well this week as investors flocked to the relative safety of US bonds. For context, the 30yr US Treasury yield fell to a fresh year-to-date low of 1.74% on Wednesday. While Brazilian bond yields have fallen recently, it must be noted that yields across the curve ended the session higher yesterday.

Looking ahead, the broader bearish bias in emerging market bonds is expected to remain intact though into 2022. Notwithstanding the marked decline in international oil prices, emerging market central banks are expected to continue tightening monetary policy, which will continue to buoy shorter-dated EM bond yields.

Although much of the focus will be on the Q3 GDP print and developments surrounding the precatorios bill in the session ahead, secondary market bonds could also take direction from the outcome of National Treasury’s weekly bond auction. Treasury plans to come to market with a slate including fixed-rate LTN bonds maturing in 2022, 2023 and 2025, fixed-rate NTN-F bonds maturing in 2027 and 2031 and Selic-linked LFT notes due 2023 and 2027.

Mexico: Consolidation was the order of the day for Mexican bonds yesterday following this week’s run of gains. Investors had numerous events and data releases to digest during the session, which will be scrutinised through the session ahead. Investors are also positioned for the central bank cutting its growth forecast for the year amid persistent headwinds, if the limited movement on the long-end of the curve is anything to go by. The same goes for the inflation reading. Meanwhile, some payer bias was recorded on the front-end of the IRS curve yesterday, as they rose 8bps - 13bps in line with increasing expectations of quicker than expected tightening by the Fed. The curve is currently pricing in about 25bps worth of domestic rate hike risk for the remainder of 2021 and about 160bps worth of tightening in 2022.

Colombia: Colombian bonds continued to recover on Wednesday, with yields falling sharply across the curve through the session. Moves were especially pronounced at the front-end of the curve, which tracked IRS rates lower as investors scaled down bets for aggressive BanRep policy tightening amid uncertainty over how the Omicron COVID-19 variant could impact growth and inflation. Longer-dated tenors also shed notably from their yields through the session, although they remain cheap relative to early-November levels.

Chile: The bond curve consolidated yesterday however the broader trend remains one of bearish flattening. Bloomberg has the 2023 short end benchmark closing at 5.55% yesterday while the longer dated 2032 bond finished the session at 5.795% leading to the spread between the two closing at 24.5 bpts, some 0.5 bpts lower on Wednesday’s close which to be fair is negligible.

Peru: Unsurprisingly, there was some receiver interest at the front end of the yield curve yesterday following the weaker than expected inflation numbers. The moves were marginal, however, as local market volatility remains fairly low with foreigners likely sitting out given the global virus concerns and local political issues. The market is still pricing in some rate hike risk over the next few months, and we could see this increase once again if the PEN weakens further and the next few inflation readings continue to show that underlying price pressures remain robust.