Morning Note /

Latam Daily: More signs of slowing growth in Mexico, focus turns to NFP data

  • Talking Points: Mexico’s leading indicator weakens, Chile inflation data up next

  • Forex: NFP data to provide direction into the weekend

  • Fixed Income: Yields keep rising as inflation pressures keep building

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

Daron Hendricks
Danny Greeff
Kieran Siney
ETM Analytics
7 January 2022
Published byETM Analytics

Talking Points: Mexico’s leading indicator weakens, Chile inflation data up next

Brazil: Economic data released on Thursday made for some sobering reading. Coming in below consensus expectations, industrial production fell in November, adding to concerns about the extent of Brazil’s recession. Specifically, activity in the sector fell by -0.2% m/m in November compared to consensus expectations for a modest gain. On an annual basis, industrial output was down -4.4% y/y in November. The combination of soaring inflation, aggressive rate hikes, supply chain issues and political and fiscal uncertainty were some of the factors weighing on the sector’s performance.

Official data published yesterday showed that Brazilian saving accounts recorded their largest outflow in five years in 2021 as financial conditions deteriorated amid double-digit inflation and the marked increase in interest rates. For context, Brazilian savings accounts recorded a net outflow of BRL 35.5bn, the first negative number since 2016. The balance of savings accounts ended the year at BRL 1.03trn. Note that Brazilian savings accounts grew by a record BRL 166.3bn in 2020, which has partly due to the aggressive stimulus measures deployed by the government to combat the effects of the Covid-19 pandemic.

Mexico: The Mexican economy showed signs of further moderating growth in November following the release of the leading indicator by the National Institute of Statistics and Geography (INEGI) yesterday. The index remained above its long-term trend of 100 points for the twelfth consecutive month after registering a value of 101.3 points. This implied a decrease of 0.14 points compared to the previous month and emphasised the downward trend observed in recent months. Though the general state of the Mexican economy appears to be in good standing at present, there are still several headwinds, such as the supply constraints, challenges in the automotive and industrial sector and the impact of the Omicron coronavirus variant, which should be reflected in the December reading.

Yesterday, Moody’s rating agency stated that President Lopez Obrador’s commitment to fossil-fuel energy would continue to reduce the state-owned oil company Pemex’s profits and environmental challenges. Pemex (Ba3 credit rating with a negative outlook from Moody’s) has the main objectives of increasing production and oil refining capacity, in addition to ending crude exports to process all the oil it produces within the country.

Colombia: Oil is heading for a third straight weekly gain despite the fact that risk assets have had a turbulent time this week. Brent surged yesterday to over $82 per barrel and remains bid today as supply constraints among some key OPEC members have seen the market tighten. Libyan production remains crimped by ongoing civil unrest, while Kazakhstan’s largest oil producer has had to alter output at its Tengiz field following protests in the country. As a result, it is looking very unlikely that OPEC+ will meet its goal of increasing output by 400k barrels a day through January, with the outlook for February not too much brighter in terms of production levels. Demand for prompt barrels of oil has also been rising, which has seen the spread for the nearest dated contracts rise to around 75cents per barrel currently. This is its highest since mid-November, just before the Omicron scare roiled markets, and suggests that we could see prices rise back towards $85 per barrel in the near term.

Chile: The final session or the week brings with it the latest local CPI data, as well as trade and reserve figures. Inflation is likely to have accelerated further in December, with consensus pencilling in a rise to 7.00% y/y. This will be the highest rate of price growth since December of 2008, and suggests that what tightening the central bank has done already has not had much of an impact just yet. More rate hikes, therefore, will definitely be coming. Meanwhile, it is estimated that the trade balance surplus seen in November will have shrunk in December, owing to greater imports given the still strong levels of local demand. Higher international oil prices will also be playing a role here. The reduction of the trade surplus poses another risk to the CLP going forward.

Peru: The BCRP kicked off 2022 with a 50bp rate hike, matching market expectations. The benchmark interest rate is now at 3.00% following six straight hikes. The accompanying forward guidance was more hawkish than what was seen in the December meeting, with the communication dropping a reference to the need to maintain an expansionary stance. Expectations for inflation to return to the target range were also pushed back out to the final quarter of the year, compared to early in H2 as predicted late last year. As such, we could see a faster pace of policy normalization over the coming months than what was anticipated after the December meeting. The door was left open to larger rate hikes, as well as the possibility that we could see one at each of the upcoming meetings. We expect at least another 50bp rate hike the next time the MPC committee meets.

Meanwhile, Peru's copper output slumped in November according to the energy and mines ministry. No reason was given but it was very likely a result of the protests that took place near key mining corridors, that eventually forced the shutdown of a key mine in December for a few days. Copper output fell by 5.6% y/y during the month, with zinc and lead production also down by 18% and 5% respectively compared to November 2020. The drop in copper was more than 9% when compared to October's levels. Output of precious metals, however, offered some reprieve with gold and silver production rising by 2.7% and 0.8% y/y. The December numbers will, as a result of the protests and shutdowns, potentially look even worse.

Forex: NFP data to provide direction into the weekend

Brazil: The BRL snapped its losing streak on Thursday. While Fed jitters persisted, the BRL managed to claw back some lost ground yesterday with the local unit strengthening by 0.53% against the USD to end the session at 5.6856, according to Bloomberg data. The appreciation in the BRL came despite disappointing economic data and as such was seen as more of a correction than anything else.

A poll conducted by Reuters showed that analysts expect that most currencies will struggle to make any material headway against the USD in the year ahead as monetary policy in the US is tightened. Reuters said in its report that almost two-thirds of the forty-nine foreign exchange analysts surveyed said interest rate differentials would dictate sentiment in major FX markets in the near term.

Reuters highlighted in the report that only two strategists were concerned about new coronavirus variants and the impact that it could have on the dollar. The majority of strategists said that volatility in FX markets would increase over the coming three months, with well above 80% saying so for both majors and emerging market currencies.

Looking ahead, the Fed has increased the pace at which it is winding up its asset purchase program. Moreover, it is widely expected that the Fed is likely to deliver three 25bps rate hikes this year, which would mark a significant shift in monetary policy following the aggressive QE that took place in 2020 and 2021. That said, while we remain bullish on the USD for now, we caution investors of becoming overly bullish on the greenback. If fundamentals reassert themselves, the wide US current account and fiscal deficit that the US is currently generating should become currency depreciative..

Mexico: The USD-MXN whipsawed between the 20.400 mark and the 50DMA resistance at 20.850 yesterday amid the mixed market sentiment as investors responded to the central bank’s meeting minutes and key US jobs data before closing lower at 20.5045. Notably, the one-month USD-MXN implied vol fell for a second day to 10.708%, the lowest since Nov. 12.

Heading into the NorAm session, the greenback is trading without clear direction with the scheduled release of non-farm payroll figures. When combined with next week’s US inflation reading, the data releases could reinforce the need for faster US interest rate hikes, which has kept US Treasuries trading on the front foot this week. The USD-MXN is trading lower, eyeing the 20.400 mark. The pair’s bearish bias is likely to be capped by the strong 200DMA support at 20.2740.

Colombia: After gapping to levels north of 4100/$ during overnight trade due to the Fed's hawkish meeting minutes, the COP recovered through yesterday's session as the market priced-in Wednesday's high CPI print and expectations for BanRep to hike rates more sharply in the months ahead. However, ultimately, the currency closed yesterday's trade some 0.20% in the red, although this still marked a strong move away from the 4100/$ mark where it was trading earlier this week. Technically, the COP looks comfortable between 4000/$ and 4100/$ for now, although the risk is tilted towards further depreciation as investors navigate political uncertainty and an increasingly hawkish Fed..

Chile: The bullish bias in the CLP moderated on Thursday with the local currency closing the session marginally firmer against the USD at 837.25, according to Bloomberg data. While the CLP looks set to end the week in the green against the USD, it must be noted that the broader bias in the currency is decisively bearish. For context, compared to this time last year, the CLP has depreciated by just less than 20% against the greenback. The broader weakening bias in the CLP has been a function of a stronger USD, a deterioration in the country's fiscal dynamics and heightened political uncertainty. While we remain bearish on the CLP in the near term, the chance for a significant sell-off from current levels is slim.

Peru: The USD-PEN climbed for a second straight session yesterday, weakening ahead of the local rate decision. The hike and hawkish forward guidance could pressure the pair lower at the open today, but tetchy market conditions mean that we shouldn't see any major moves, unless we get some major surprises from the US NFP data. For now, we still see the 200DMA as the main support to watch, which will keep attracting USD-buying.

Fixed Income: Yields keep rising as inflation pressures keep building

Brazil: Brazil’s 10v2 swap spread fell deeper into negative territory on Thursday as rates on the front-end of the curve traded higher, tracking the rise in international oil prices. Meanwhile, downbeat economic data saw rates on the long end of the curve fall on the session. Given the persistent inflation pressures against the backdrop of a deteriorating economic outlook, we expect the 10v2 swap spread to remain inverted in the near term.

Mexico: MXN bonds held an offered tone yesterday, with yields rising along the curve, 5bps on average. The front-end and the belly of the curve reported most of the bid action, moving in line with US Treasuries. The market's response to the central bank’s meeting minutes was somewhat muted as investors are keenly awaiting today’s CPI reading before readjusting their inflation expectations and positions. Traders will assess the inflation figures against the hawkish rhetoric adopted by the central bank in the latest meeting minutes. Therefore, a bumper CPI figure could see a moderate payer’s bias take hold on the front-end of the IRS curve, building on the topside momentum seen in the local swaps market at the start of the year.

Colombia: In response to this Wednesday's higher-than-anticipated CPI print, the Colombian yield curve rose sharply yesterday as the market priced in a more aggressive monetary tightening cycle. The belly of the curve led the charge higher, with the 6-year tenor adding more than 21bps to its yield through the session, followed by the 4-year and 5-year tenors, which rose by more than 15bps each. The broader bias remains to the topside for Colombian yields, with investors cutting exposure due to political uncertainty ahead of this year's elections, and expectations for BanRep to raise the benchmark interest rate sharply in the months ahead. Heading into the long weekend, however, the focus will be on external developments, with the US employment report for December set to provide the market with directional inspiration..

Chile: At the risk of sounding like a stuck record, the flattening bias in the Chilean swap curve persisted on Thursday. The 10v2 swap spread plunged deeper into negative territory, closing the session at -20bps, the lowest level in years. Note that the 10v2 spread was trading at a high of 230bps in the first half of last year. Underpinning the marked flattening bias in the curve over the past 8 months has been the sharp rise in inflation pressures, which has prompted a dramatic shift in monetary policy both domestically and abroad. Adding to the flattening bias has been concerns over Chile's economic outlook, which isn't looking as rosy as it did earlier last year. Going forward, we expect the flattening bias in Chile's bond curve to remain entrenched in the next 3 months. Note that a topside surprise in today's inflation data against the backdrop of higher international oil prices could see the 10v2 spread fall deeper into negative territory, especially if it fuels bets for more aggressive interest rate hikes in the coming months.

Peru: Sovereign yields continued their push higher yesterday, buoyed by risk-off trading conditions and higher UST yields. Investors may also have positioned for the BCRP meeting, which took place after market hours. The reaction to the meeting at the open today should see front-end yields keep rising, given that more rate hikes are now looking likely. Some focus will also be on the US payrolls numbers, which could generate some volatility in the markets should we see any surprises in the data.