Morning Note /

Latam Daily: Regional monetary policy outlook looking less hawkish now

  • Talking Points: Banrep in focus as hawkish bets have been reduced

  • Forex: BRL heading for notable quarterly gain, COP direction to be based on rate announcement

  • Fixed Income: Colombian swap rates sink ahead of Banrep meeting

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

Daron Hendricks
Kieran Siney
ETM Analytics
31 March 2022
Published byETM Analytics

Talking Points: Banrep in focus as hawkish bets have been reduced

Brazil: Things on the data front quietened down today, with the only notable release being the February unemployment report. Consensus expectations suggest that the unemployment rate edged higher in February, with economists pencilling in a figure of 11.4% for last month. As mentioned in yesterday’s report, while there has been a marked improvement in labour market dynamics over the past six months, the level of slack in the labour market remains elevated.

Traders had a plethora of fiscal and inflation data to contend with yesterday. National Treasury said on Wednesday that Brazil’s federal public debt increased 2.03% m/m in February to BRL 5.73trn. Total domestic debt stock climbed 2.3% m/m last month to BRL 5.49trn. Treasury added that the average interest rate on the domestic federal debt increased to 9.5% in February from 8.9% in January. The average rate on the new domestic debt issued in the 12 months to February rose to 9.25% from 8.92%.

National Treasury also noted that average issuance rates started the month at a lower level but rose again from the second week onwards, in a period marked by inflationary pressures amid Russia's invasion of Ukraine. Furthermore, Treasury said that the recent easing in the yield curve, helped by the stronger currency performance and the central bank's signals that it should end its aggressive monetary tightening cycle to tame inflation.

Mexico: The Mexican unemployment rate rose to 3.7% in February, above market expectations of 3.65% and January's 3.71%. The employed population rose by 3.3mn to 56mn, while the unemployed decreased by 248k to 2.2mn, according to data released by the National Statistics Agency (INEGI). The tertiary sector concentrated most of the employed population, which reported a 2.4 percentage point increase in February from the same month a year earlier.

In the first two months of the year, Mexico reported a primary public deficit of MXN170.40bn, MXN3.9bn less than the deficit forecasted for the respective period, but higher than the deficit registered in the first two months of 2021 of MXN99.0bn. During the first two months of the year, public revenue registered an increase of 6.4% y/y to MXN987bn due to higher tax and non-tax revenues and higher non-oil revenues. On the other hand, public expenditure rose by 12.6% y/y to MXN1,162trln. Though this was MXN104.4bn less than expected for the period, it points to the lack of fiscal restraint. Spending on social protection stands out as the most significant contributor to the increased expenditure, alongside funding for states and municipalities..

Colombia: Banrep was widely expected to announce another 150bp rate hike today and keep the door open for further tightening given the surge in inflation. However, the recent decisions out of Chile and Brazil, which were less hawkish than expected, have caused some concerns among traders regarding how hawkish Banrep will be today. Rising inflation and higher inflation expectations suggest that the bank should remain very hawkish and deliver the 150bp hike, which would also then help Colombian assets relative to some of its peers, given the less hawkish stances that we have seen there. Currently, one-year inflation expectations are around 4.5%, above the central bank target band, while two-year expectations are at 3.67%, near the upper bound of the target range. Colombia's large twin deficits also speak to the need for greater rate hikes.

Meanwhile, conservative candidate Gutierrez, meanwhile, met with Liberal Party Chief Gaviria yesterday in an attempt to gain the party as a significant ally ahead of the elections. Gaviria will be a key figure that both Gutierrez and his leftist opponent Petro will need to have on their sides, depending on who wins, in order to have any significant sway within Congress. Backing from Gaviria does not automatically mean that all within his party will support whoever's side he takes, but it should be enough to bring several key lawmakers over. Preliminary results have shown that the Liberal Party will have 15 seats in the Senate and 32 in the Lower House, making it one of the more powerful parties. Gutierrez is the more likely to gain Gaviria's support after Petro's running mate criticized the Liberal Party leader

Chile: The BCCH released its monetary policy report on its website yesterday in which it highlighted its expectation of rising inflation for the first half of 2022, anticipating levels closer to 10% before tapering in the second half of the year. On the growth front, the report pencilled in between 1% and 2% for 2022, while GDP is likely to range between -0.25% and 0.75% for 2023 before recovering in 2024 to between 2.25% and 3.25%. Governor Rosa Costa spoke to lawmakers yesterday and her tone was closely monitored by the market. She emphasised that the bank would do what is necessary to get CPI to the target level and reinforcing the statements made in the monetary policy report.

Looking at the day ahead, we have both consumer and corporate data on the cards. Manufacturing and Industrial production for Feb will be watched. The data is expected to show that the economy continues to slow with the effects of the massive stimulus programmes now fading rapidly. Equally this data will capture the start of the Ukrainian conflict, which has caused massive spikes in the cost of raw materials as well as additional dislocations in the logistics chain. The consumer is being represented by the Retail Sales print for February. Once again, we expect a slowing of dynamism in the sector. The market has pencilled in a print of 12.2% versus 14.2% at the January release.

Peru: Former Fin Min Francke spoke in an interview yesterday, sounding rather bearish on the government's prospects for dealing with the current inflation episode. Francke believes that the government is not assessing the impact of rising inflation on the economy well enough and what the political and social responses to this will be. As such, Francke sees Castillo's popularity being eroded unless the government takes some significant action. Francke also noted that the social conflicts surrounding the mining sector aren't being resolved, entrenching a red flag for international investors, while the government will struggle to come to terms on important policies such as pension withdrawals.

Forex: BRL heading for notable quarterly gain, COP direction to be based on rate announcement

Brazil: While the USD-BRL edged higher yesterday, climbing 0.29% to 4.7715, the pair seems to be settling in a range as the bullish momentum seen last week fades. Moreover, although the BRL came under some modest selling pressure yesterday, the local unit still looks set to record its best quarterly performance against the USD in more than a decade. Since the start of the year, the BRL has gained just shy of 15% against the USD in Q1 2022, supported by soaring commodity prices and the country’s now positive real interest rates.

Mexico: The USD suffered further losses on Wednesday as risk appetite improved at the margin, and the safe-haven bid the USD has enjoyed has eased. This resulted in investors cautiously returning to riskier currencies. The MXN strengthened against the USD to touch its strongest level since August at 19.8181/USD. The MXN settled at 19.8750/USD and is up by 3.8% as we enter the last session of the month. The MXN’s strong rebound this month has seen it retain its place among the top five emerging market currencies out of twenty-four tracked by Bloomberg. In pre-market trade, the MXN has fluctuated as traders shift their focus to the US initial jobless claims and PCE reading, both of which have significant implications for the USD and the Fed’s policy normalisation path for the year. As a result, expect some whipsaw price action in the run-up to the releases.

Colombia: The USD-COP tested a break below 3750 yesterday, but reduced bets of a more hawkish Banrep meant that the pair could not sustain the break. This will, therefore, be the key level to watch in the sessions ahead. If we see Banrep maintain its hawkishness, the pair could slide below this level and test its YTD lows of 3729.17. We could also expect to see near-term hedging costs rise ahead of the meeting today, given that the outcome is now a bit more uncertain.

Chile: The Central Bank pushed any thoughts of aggressive rate hikes to the side and this has tempered any ideas of better carry for the CLP in coming months. Given this backdrop it was not surprising to see the CLP give back some of its gains and close just short of the 790 mark overnight. That said, the CLP is still benefiting from a weaker USD, but not to the same degree as other emerging markets now have better carry characteristics.

Peru: The PEN was on the front foot yesterday, although we are still trading well within the recent range of between 3.7500 and 3.7000 to the USD. The constant political woes within the country will keep the PEN relatively vulnerable and may prevent a further rally beyond 3.7000 or the YTD high of 3.6680.

Fixed Income: Colombian swap rates sink ahead of Banrep meeting

Brazil: While Brazil recorded a worse than expected primary budget deficit in February, the annual reading remains positive supported by a spike in tax receipts. The strong tax collections have partly been driven by soaring commodity prices, resulting in increased collections from the mining, resources, and agriculture sectors.

That said, the fiscal data, together with a stronger than expected second-tier inflation reading, triggered a reversal in Brazilian bond yields yesterday. Specifically, the 2yr and 10yr yields climbed 19bps and 12bps to 12.28% and 11.74%, respectively. Adding to the headwinds for Brazilian bonds yesterday were reports that the government is considering granting a 5% pay increase to civil servants to help compensate for inflation losses and fading optimism surrounding the peace talks between Russia and Ukraine.

Looking at the session ahead, the National Treasury plans to sell fixed-rate LTN local currency bonds in 2023, 2024 and 2025 and fixed-rate NTN-F bonds maturing in 2029 and 2033.

Mexico: Swap traders' reaction to Banxico’s Deputy Governor Gerardo Esquivel’s recent remarks that Mexico’s inflation will likely peak in Q2 has been negligible. This comes off the back of a stronger MXN and waning crude oil prices that have eased inflation fears. Specifically, the past five sessions have seen a receiver bias dominate the IRS curve, unwinding some interest rate expectations that has seen swap rates paid 80bps higher over the month. Until commodity and food prices fall considerably in the months ahead, Banxico bank may need to raise its interest rates as quickly as the Fed and other emerging market economies to avoid falling behind the curve and losing its attractiveness. TIIE swap rates are pencilling in more than 130bps worth of rate hike bets for this year, which would take the benchmark interest rate to 7.8% by the end of 2022.

Colombia: Colombian swap rates plunged yesterday following the Chilean central bank decision that was less hawkish than what many expected, sparking concerns that Banrep could do something similar today. Rates at the front-end sank more than 20bp on the day, steepening out the curve as some unwound their bets of a more hawkish Banrep. Today's announcements, therefore, could generate some volatility in the market. If the bank remains as hawkish as it has been, we could see some material payer interest re-materialize at the front end of the curve.

Chile: As expected the dovish tone of the Central Bank at Tuesday’s rate decision put payers to the sword across fixed income products. 2yr IRS fell by 82.5 bpts, while 10yr fell by 17.5 bpts according to Bloomberg data. This has caused a massive dis-inversion of the curve with 2v10 now quoted at -115 bpts versus north of -190 bpts as we went into the decision. Looking at the day ahead, we may see some of these gains given back today as the market reprices, but we do not expect the stretched levels of -190 bpts any time soon again.

Peru: Local currency bonds continued to rally yesterday, supported by sliding UST yields and a drop in oil prices which will be tempering some inflation concerns. The curve continued to flatten out as a result, with yields around the 10yr sector dropping as much as 11bp on the session. Dollar bonds also gained on the session, although the moves were fairly uniform across the curve. Yield on the 2026-dollar bond dipped back below 3.20% as a result, while yields on the 2051 bond slid back below 4.00% for the first time this month. With oil prices still sliding today and general levels of risk appetite looking favorable, we could see the rally for Peruvian bonds continue, albeit potentially not at the same pace as we have seen over the last two days.