Morning Note /

Latam Daily: Peru gets another new cabinet, inflation data in focus today

  • Talking Points: Brazil and Mexico CPI data out, Colombia gets approval from Fitch

  • Forex: Markets likely to be cautious ahead of US CPI data

  • Fixed Income: Pemex bonds may avoid further downgrades

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

Daron Hendricks
Danny Greeff
Kieran Siney
ETM Analytics
9 February 2022
Published byETM Analytics

Talking Points: Brazil and Mexico CPI data out, Colombia gets approval from Fitch

Brazil: It was a busy day in Brazil yesterday. Kicking off with the release of the central bank minutes, economists and analysts broadly revised their rate hike expectations higher after the central bank left the door open for further tightening beyond the expected March end point. Prior to the meeting minutes, economists were calling for the tightening top end in March. However, analysts now see the central bank hiking by 50bps in May. Even as oil prices corrected lower, traders increased their interest rate bets with the market baking in a higher probability of an additional hike in May. This came after the Copom said that it “once more concluded that the monetary tightening process should be more restrictive than that used in the reference scenario throughout the relevant horizon.” The BCB also noted that uncertainty about asset and commodity prices led it to avoid signalling the magnitude of the next interest rate hike.

Although the BRL has staged a marked recovery in recent days, the topside bias in commodity prices remains entrenched. This suggests that inflation risks in Brazil remain tilted firmly to the upside, despite the aggressive policy tightening over the past 11 months. Note that much of the recent inflation pressure is due to supply-side cost pressures. Therefore, the impact of the aggressive policy tightening is going to be far less pronounced than if it were an environment where inflation was being driven by demand side pressures.

Mexico: Yesterday, a top business lobby in Mexico expressed concerns over the energy bill as it would strengthen the state's grip on the energy market and make it harder for American companies to meet their climate targets. The legislation championed by President Lopez Obrador is likely to undermine wind and solar power investment in Mexico, during a period in which companies are under pressure to improve their clean energy mix. Suppose US companies cannot meet their commitments because Mexico cannot provide enough clean energy. In that case, these companies will not be able to continue operating in the country, according to remarks made by Ana Lopez, Head of the American Chamber of Commerce in Mexico (Amcham). Members of Amcham are concerned that the initiative may violate Mexican commitments under the US-Mexico-Canada Agreement (USMCA) trade agreement.

Inflation is still a hot topic right now, and Mexico will release its January inflation data today ahead of this week's central bank meeting. Policymakers will be hopeful that consumer prices continued to moderate early on in the year after December’s CPI reading eased to 7.36% y/y. Consensus expectations are for inflation to come in at 7.01% y/y in January, likely due to lower non-processed food and energy prices which are being offset from core goods and service costs. Nevertheless, if the estimated figure is realised, inflation remains above the central bank's target rate and supports future rate hikes. The tightening of external financial conditions in the US and other advanced and emerging economies also supports increases.

Colombia: Responding to the Colombian government’s recently-improved macroeconomic and fiscal projections, Fitch Ratings noted that Colombia’s fiscal progress going forward would depend greatly on how much the government will spend to support the economic recovery. In that regard, the upcoming presidential and congressional elections will be important, with medium-term fiscal and growth prospects highly dependent on policymaking by the incoming government and consensus-building in Congress. Fitch said that its view was that “no presidential candidate, including current front-runner, leftist Gustavo Petro, is running on an anti-establishment platform,” and that “Congress looks likely to remain fragmented and largely centrists, requiring consensus-building to pass legislation”. While political uncertainty in the markets remains high, any signs of a more moderate outcome than is currently being expected could drive a strong recovery of Colombian bonds and the COP down the line.

Chile: Yesterday’s inflation numbers can only be termed a shocker. The month on month reading printed at 1.2% which was more than twice the median forecast of 0.5% in January. The year on year reading came out at 7.7% rising for the 11th consecutive month and this reading has certainly shelved any thoughts that inflation has peaked, in fact inflation is running wild and it is providing policymakers with a massive headache. The warnings of inflation following the successive AFP withdrawals and government stimulus programmes have materialised. Consumer spending and higher commodity costs are the major drivers and we expect an ultra-hawkish response from policy markers going forward

Peru: President Castillo swore in Oscar Graham as Finance Minister yesterday, sticking with the initial choice who is popular with investors. Justice Minister Anibal Torres, meanwhile, took over the vacant PM role. Torres belongs to no political party, but has sided with President Castillo before as he supports the calling of a referendum to change the country's constitution. Other changes saw Carlos Palacious, a member of the Peru Libre Party, installed as mining minister while Health Minister Cevellos left the Cabinet.

Torres is another controversial pick having received criticism before for firing an Attorney General who filed a complaint against Castillo to the prosecutor's office. The pick suggests that Congress will unlikely alter their view of his Cabinet and could continue with efforts to oust the president. The public may also disapprove of several picks, adding ammunition to calls for his impeachment.

Forex: Markets likely to be cautious ahead of US CPI data

Brazil: It was a mixed session for emerging market currencies yesterday, with the likes of the South African Rand gaining 1.00%, while the Chilean Peso ended the session -0.34% weaker against the USD. The BRL meanwhile closed relatively unchanged from the previous session’s close at 5.2586, according to Bloomberg. While the bullish bias stalled yesterday, the BRL is still the best performing emerging market currency this year, with the BRL up 5.70% against the USD on a year-to-date basis. Given the bullish outlook on commodities and marked improvement in monetary policy dynamics, we see value in going long on the BRL.

Mexico: The Mexican peso weakened against the USD on Tuesday, closing at 20.6146/USD, pressured by rising US Treasury yields and the greenback. Liquidity was somewhat affected by Monday’s holiday and flows being biased towards MXN selling. This week's key event for the local currency is today’s CPI reading ahead of the central bank meeting, which should offer some support to the MXN. The MXN has strengthened ahead of the US Open, looking to probe the 20.500/USD mark, but its advance going forward will be restrained by the long-standing 200DMA resistance at 20.3284/USD, supporting a still bearish bias on the MXN.

Colombia: The COP recovered from an intraday retreat to close yesterday’s session some 0.45% in the green. It was telling that the currency couldn’t break through its 50-session moving average during its initial decline, with this, of course, the support of its recent trading range. The move suggests the COP will likely continue to trade between that line and its 100-session moving averag, at least until a new catalyst arises to provide fresh directional impetus.

Chile: In terms of the local unit our view is unchanged. The USD-CLP remained bid however the 50DMA resistance level remained elusive for the bulls. We remain buyers on any dips with a view that the 833.50 50DMA will give way in due course.

Peru: The USD-PEN was largely unchanged yesterday at just below the 3.85000 level, with the markets waiting to see what would happen with the Cabinet choices. Although the Fin Min is seen as market positive, investors may become nervy following the appointment of a controversial PM once again. This could offset a more positive risk environment and higher commodity prices, keeping the pair fairly steady around current levels.

Fixed Income: Pemex bonds may avoid further downgrades

Brazil: Given the hawkish narrative from the central bank minutes against the backdrop of rising commodity prices, it is no surprise that Brazilian swap rates traded higher yesterday. Specifically, the shorter-dated 2yr rate rose by 19bps yesterday to close the session at 11.49%, while the longer-dated 10yr rate climbed 17bps to 11.49%. Following yesterday’s move, the 10v2 swap spread is flat. Looking ahead, given the strong supply-side inflation pressures, we expect the flatness in the curve to persist in the months ahead.

Mexico: Investors preferred Mexico's 3yr inflation-linker over the 3yr Mbono at yesterday's bond auction due to elevated consumer prices both domestically and abroad. Yesterday's auction saw 950 UDI units sold, 100 UDI units more than the previous auction, with a yield of 3.47%, up from 3.20%.

According to a statement from the Finance Ministry, Mexico refinanced part of its debt by placing an 8yr euro-denominated bond for a total amount of €800mn, which will pay a coupon of 2.375%.

Meanwhile, Moody’s Investors Service has stated that there is less chance that Pemex’s bonds will be further downgraded to junk territory this year, thanks to recent government aid, higher crude oil prices and stabilising production. Pemex's debt is thought to have decreased last year, noted Moody’s, so there should be less of a burden this year. Moody’s rates Pemex Ba3, three notches below investment grade, with a negative outlook. Some investors have questioned Pemex’s credit rating since the oil producer announced in December that it would stop exporting crude by 2023 as part of a government goal of producing all of Mexico’s fuel domestically. This plan, of course, poses concerns in the longer term.

Colombia: The Colombian yield curve’s flattening bias came to an abrupt halt on Tuesday, with yields instead rising sharply across the curve as oil prices tumbled and UST yields rose to new multi-month highs. Moves of over 15bps were seen across most of the Colombian curve, potentially reigniting the broader uptrend that began in September last year. Political concerns, local rate-hike risk, and tightening financing conditions abroad remain the central drivers of market sentiment at present, and will likely prevent any material recovery in the near term.

Chile: Not surprisingly there was aggressive paying interest on the front end of the bond curve following yesterday’s inflation print. The 2024 bond finished just short of 40 bpts higher on the session according to Bloomberg data while the 2030 bond finished 17 bpts higher leading to sharp bearish flattening once again. Bloomberg has the 2024 to 2032 bond spread at -45.80 bpts which is a new low for the year.

Peru: Not much change to report back on for the local sovereign yield curve, with changes in yield limited to just a few bp across the board. There was some more pronounced weakness when looking at dollar bonds, with yields there rising by between 2bp and 6.50bp on the day. As we have noted before, the yields along the dollar bond curve are looking fairly attractive for those looking to hedge against possible currency weakness, which is a high risk still given the political space in the country at the moment. For the day ahead, we may see some consolidation ahead of the local rate decision and US CPI data out tomorrow, although the political developments from yesterday could drive some cautiousness.