Talking Points: Colombia inflation surges as global stagflation risks build
Brazil: While stagflation risks have intensified at the start of the new week as oil prices surge, we can report that Brazil’s economy exited its technical recession in Q4. Specifically, the recovery in economic activity in Q4 was stronger than expected, with Brazil’s economy expanding by 0.5% q/q in Q4 2021. On an annual basis, GDP rose by 1.6% in Q4, bringing the full year 2021 GDP reading to 4.6% and slightly above its pre-pandemic level. Details from the GDP report revealed that a rebound in the agri, construction and services sectors offset weaknesses in other areas of the economy. Moreover, it is worth noting that all components of domestic demand gained in Q4.
Looking ahead, while Brazil has limited ties with Russia, as is the case with the rest of the world, the war in Ukraine is expected to have a material impact on domestic growth, even if it is indirectly through mechanisms such as inflation. For now, economists expect Brazil’s economy to expand by 0.3% in the year ahead. We assess the risks to the domestic growth outlook to be skewed to the downside amid surging inflation risks and tighter monetary conditions.
Mexico: The Ministry of Finance and Public Credit (SHCP) activated a new fiscal stimulus to control gasoline prices in Mexico and prevent the rise in oil prices due to the war in Ukraine and its impact on the energy sector as it has the potential to affect the purchasing power of Mexican consumers. The stimulus is expected to remain in place for as long as oil prices continue to rise. It has been a dramatic start to the new week, with oil prices surging following discussions by the US regarding cutting off oil supply from Russia. Brent briefly touched $139 per barrel earlier today as supply fears fanned an already volatile market, although some of the gains were pared to help the market trade back down to $129 per barrel currently. At such prices, the market is pricing in sanctions on Russian crude already, but there may still be some upside left if a full-on ban is implemented in the near term. Therefore, the market is expected to remain volatile in the coming sessions, with any developments on the war front likely to lead to notable price swings.
The economic calendar has consumer confidence data and an economic survey by Banamex scheduled for release. Concerning the former, the economic survey is likely to highlight raised inflation forecasts and a slower economic growth outlook for the year ahead owing to the deterioration in the global macroeconomic backdrop as policymakers quantify the inflationary impact of higher commodity prices and persistent supply chain snags. Banxico and other central banks now face the tricky task of tightening monetary policy to contain inflationary pressure without upending economic expansion
Colombia: CPI numbers released over the weekend showed that inflation exceeded expectations in February, rising from 6.94% y/y to a 2016-high of 8.01%. Surging food and energy costs are hitting Colombian consumers hard, with this inflation only set to accelerate in the coming weeks due to the ongoing Russia-Ukraine war. This will add pressure on the central bank to do more to rein in surging prices, especially given concerns over the impact of prevailing inflation on inflation expectations. However, the central bank finds itself between a rock and a hard place, as it will also need to weigh in the impact the war will have on global economic activity.
The latest poll results suggest very little has changed in terms of voter intentions ahead of the upcoming elections, with leftist Senator Gustavo Petro and his political party, Historic Pact, still leading the race. Of those Colombians surveyed, 38.4% said they would vote for Historic Pact, and 32.7% said they would vote for Petro. While this points to a market unfriendly outcome, the focus is currently fixed on offshore developments and the impact of the Russia-Ukraine war on global commodity prices.
Chile: While the broader investment community is rightly focused on the rising conflict in the Ukraine the local trade data will be the focal point for today. The trade figures take place against the backdrop of strained supply chains which would have been felt towards the back end of February as the tensions in the Ukraine rose. The market has pencilled in a deficit of $362m but some are suggesting that this deficit could be higher. Preliminary export figures have shown lower shipments of mining, agricultural products and manufactured goods which is as a result of seasonal factors and some supply issues.
Peru: The BCRP is expected to hike rates by a further 50bp this week, although there are topside risks to this view. BCRP Chief Velarde's comments recently that the economy is facing a growth problem but will unlikely dip into a recession is supportive of a possible 75bp rate hike, or at the least a more hawkish stance compared to the last meeting, given what is happening on the prices front. Inflation remains high and inflation expectations will be rising as global oil and food prices surge in the wake of the Russian invasion of Ukraine. There are also the ever-present political concerns, recent currency depreciation, and financial stability concerns to factor in. Our base case is for a 50bp rate hike this week and forward guidance suggesting that the pace of further hikes could quicken if inflation expectations continue to rise
Meanwhile, Peru's Libre Party has proposed a bill that would allow people who withdrew part of their pension funds during the pandemic to now access 100% of their funds this year. Labor Minister Chavez has said that she has asked the Congressional Economy Commission to give priority to the debate of the bill. The Finance Ministry has estimated that this could amount to around 78bn PEN in withdrawals, or 58% of total savings. The 100% is likely to be a negotiating tactic to get a smaller amount passed through. Nevertheless, any percentage will be a significant amount withdrawn from pensions, and could have a notable impact on the bond market
Forex: COP outperformance may persist as oil surges
Brazil: The BRL ended Friday’s session marginally weaker against the USD. Specifically, the BRL lost 0.75% against the USD to close the week out at 5.0648, according to Bloomberg data. Although the BRL came under some modest selling pressure, the BRL remains the best performing emerging market currency in 2022. The combination of capital inflows, soaring commodity prices, real positive interest rates, and better than expected fiscal data is supporting the outperformance of the BRL. According to estimates by Itau BBA, Brazilian equities are expected to receive $1.3bn in inflows as a result of Russia’s exit from major indices such as the MSCI.
Mexico: Due to persistent risk aversion from the escalating crisis in Ukraine, the USD-MXN rallied hard into the weekend, finishing at an eleven-week high of 20.9499, at a time when financial markets could be stressed by less easy monetary measures in the US. The pair has continued its advance this morning, breaking above two major technical levels, namely the 21.000 psychological level and the 50.0% Fibo retracement level at 21.2034, as investors rush to safe-haven assets, propelling the USD to its highest level since pandemic-induced volatility two years ago. With the situation escalating, the USD-MXN might test the November 2021 highs of 22.1550 in the coming sessions.
Colombia: Despite some profit-taking into the end of last week, the COP still closed the week as the best-performing EM currency. It advanced 2.20% on aggregate over the five sessions, supported by Colombia's strengthening terms of trade and a broader rotation into the LatAm region as investors cut exposure to European EMs. The COP could remain in favour at the start of the new week, especially since oil prices have soared over the weekend to new 2016-highs.
Chile: The local unit finished above the 800 handle on Friday with a stronger USD providing the platform to book profits on CLP longs. We expect the 800 level to remain the pivot for now, with investors assessing the stronger copper price against risk off and the trade numbers through the course of today’s trading session.
Peru: The USD-PEN closed last week at 3.7569, rising on the session as global markets were in risk-off mode given the escalating conflict in Ukraine. Today has been another volatile session thus far and we should see the pair remain under some topside pressure. The level to watch to the topside for now is 3.8000, which coincides nicely with the 61.8% retrace level of the USD-PEN's 2021 trading range. The level has attracted some notable PEN buying since early February, and with such a strong terms of trade at the moment and an influx of funds into Latam, we could see this persist.
Fixed Income: Peru’s pension bill could have notable impact on bond market
Brazil: As would be expected, given the spike in food and energy prices, Brazil’s swap curve bear flattened on Friday as traders priced in more risk of rate hikes in the months ahead. For context, the 10v2 swap spread tanked to -73bps, its lowest level in the pandemic era. With oil prices reaching an intraday high of $139/bbl this morning and food prices surging ahead against the backdrop of global risk-off conditions, the bear flattening in Brazil’s swap curve is expected to persist in the near term..
Mexico: On Friday, the domestic bond market returned to levels last seen a year ago, continuing a trend of weakening Mbono's. The sovereign bond yield curve has shifted broadly higher since the beginning of the year, with more noticeable topside pressure visible on the front end of the curve. Short-term bond yields, in particular, have risen by approximately 60bps on short-term forecasts for higher interest rates, both domestically and abroad, to rein in inflationary pressures. As Russia’s invasion of Ukraine continues, volatility is set to characterise bond markets and raises concerns of stagflation. As a result, investors will be keeping a close eye on Mexico's and the US' inflation numbers, which are due later this week. For the time being, we may anticipate Mbono's to remain under pressure amid the broader macroeconomic backdrop.
Colombia: After some volatile intra-week trade, the Colombian yield curve ended last week steeper and lower, having benefited from strong demand despite broader risk aversion over the Russia-Ukraine war. Investors shrugged off election risk and piled back into Colombian debt given the country's low exposure to Russia and Ukraine. The EM investable universe has shrunk significantly since Russia's invasion started, and Colombian debt has turned extremely attractive due to the relatively high yields on offer when accounting for its credit rating. More of the same is expected in the sessions ahead, with Colombia also benefitting significantly from surging commodity prices.
Chile: Paying the front end of both the bond and swap curve will be the favoured play at the start of today’s trade given the developments in the oil markets and what this means for inflation going forward. Where the curve inversion finishes is anyone’s guess, however the all-time lows of -162.5 bpts in terms of the 2v10 swap spread should not be a hindrance. We expect this level to give way with ease.
Peru: Local bonds took a bit of a battering on Friday, with yields surging by up to 15bp when looking at the belly of the curve. External conditions are negative for global bonds at the moment given the rising inflation concerns, with this being exacerbated today as oil continues to surge higher. As we have noted before, Latam bonds will benefit from the sanctions on Russia once the dust settles, especially with yields looking so attractive. Peru is a strong candidate to receive large inflows over the coming months if the situation de-escalates, but investors will be wary now of the new pension withdrawal proposals. This could have a notable impact on bond markets as local funds will need to sell in order to increase liquidity to fund these withdrawals. Developments on this front, therefore, will be closely watched.