Morning Note /

Rising inflation points to an acceleration in the pace of tightening in Latam

  • Talking Points: Brazil’s Lower House approves Precatorios bill, regional inflation continues to quicken

  • Forex: Latam currencies rally on Tuesday with the only exception being the PEN

  • Fixed Income: Inflation expectations in Mexico continue to rise, but to a lesser degree than in Bazil

Kieran Siney
Kieran Siney

Head of African Markets

Daron Hendricks
Danny Greeff
ETM Analytics
10 November 2021
Published byETM Analytics

Talking Points: Brazil’s Lower House approves Precatorios bill, regional inflation continues to quicken

Brazil: The focus in the session ahead will be centred on the October inflation print. While many expected that inflation had peaked in September, consensus expectations suggest that headline inflation accelerated to a new high last month. Specifically, inflation is expected to have risen from 10.25% y/y in September to 10.48% y/y in October, driven by soaring food, electricity and fuel prices. Recall that Petrobras raised fuel prices twice last month amid elevated international oil prices and persistent weakness in the local currency. Note that in dollar terms, the average price of gasoline in Brazil, according to ANP, has more than tripled in a little over 12 months.

As many had feared, Brazil’s Lower House passed the bill that bends the country’s spending cap rule to finance a new social program. Bloomberg reported that the so-called Precatorios bill was approved late on Tuesday by 323-172 votes, a wider margin of support than it had received in the first vote last week. According to the Economy Ministry’s calculations, the proposal being discussed in Congress sets an annual limit to the payment of such legal claims, freeing up BRL 92bn in next year’s budget, of which around BRL 50bn would be used to finance Bolsonaro’s new social program. The bill now goes to the Senate where it needs the support of three-fifths of lawmakers. The voting will also be conducted in two separate rounds.

Mexico: Mexico’s inflation accelerated more than expected in October, reaching its highest level in four years to stay well above the central bank’s target rate and supporting expectations that Banxico will need to reinstate a hawkish monetary policy stance to curb inflation expectations through a further increase in interest rates this week. Consumer prices rose 6.24% y/y in October, more than the 6% y/y seen in September and the 6.19% y/y median estimate of analysts surveyed by Bloomberg. Core CPI, meanwhile, rose to 5.19% y/y last month, a level not seen since the 2008-2009 global financial crisis, following a rise of 4.92% y/y in September. October's inflation was led by an increase in transportation, gas and other fuel costs (accounting for more than half of the month’s inflation), alongside alcoholic beverages and tobacco, education and recreation. The higher-than-expected October inflation points to lingering pressure from external shocks on Mexico’s core and non-core prices. This has led to inflation running above the central bank’s ceiling of the 3.0% +/- 1 percentage point target for the eighth consecutive month. Looking ahead, inflation is likely to continue rising this year. It should start falling in early 2022 but remain above the ceiling of the target during most of 2022.

Colombia: Finance Minister Jose Manuel Restrepo echoed President Duque’s sentiment at a virtual event organized by Bancolombia when he said the central bank should be prudent when raising interest rates so as to not “choke” recovering small and medium-sized companies that have higher debt levels. Generally, his comments encouraged dovishness, as he pointed to the lower-than-expected CPI print of last week, slowing core inflation, and his view that prevailing price pressures are primarily being driven by transitory factors.

Chile: The political landscape in Chile is always interesting to say the least. The knives are certainly out for the current President Sebastian Pinera as the lower house of Chile’s congress have approved the impeachment trial over corruption allegations which stemmed from the Pandora Papers leaks. The Pandora papers have linked the President to a $152m sale of Dominga, a copper and iron project through a company owned by his children to a close friend Carlos Delano. The papers showed that a large part of the transaction was conducted in the British Virgin Islands and this has raised eyebrows.

Peru: Protesters in Peru’s Cotabambas province are once again blocking a key mining corridor used by the Las Bambas copper mine, despite a preliminary agreement to keep the road open. These protests, which are set to last 48 hours, are taking place because there were talks scheduled for Tuesday, but the government and the mine failed to send senior representatives. Recall that Cotabambas leaders say Las Bambas has brought pollution to the area and little in the way of economic development, with protests aiming to change this. This may weigh on investor sentiment towards Peru in the near-term, although the rise in copper prices that may follow could potentially even out the impact of this on PEN-denominated assets.

Forex: Latam currencies rally on Tuesday with the only exception being the PEN

Brazil: Tuesday turned out to be an upbeat day for Latam American currencies, with a weaker dollar and improvement in global risk appetite providing a helping hand. The gains on the day were led by the CLP and the BRL, which both appreciated by more than 1.00% against the greenback. The USD-BRL broke below the 5.50 mark yesterday, which has been a strong level of support for the pair for almost three weeks, to end the session at 5.4857.

Mexico: The USD-MXN exchanged hands around the 20.300 mark yesterday after its move lower to 20.2517 was not sustained, while rate hike bets by Banxico fuelled its third straight loss and falling US Treasury yields supported risk appetite. The USD-MXN is currently heading towards 20.3500 today as the USD rebounds ahead of the US CPI reading, which is expected to surprise to the upside. This backdrop suggests that another break below the 50DMA support at 20.2940 will be hard to come by in the session ahead, and a probe of the 20.400 mark could be seen.

According to an official statement by Banxico, the central bank will hold a $200mn auction from its swap line with the US Federal Reserve today to ensure liquidity in the domestic market remains ample.

Colombia: The COP completed its turnaround on the back of rising oil prices yesterday, appreciating 0.40% against a soft USD through the session. Following the currency’s recent slide, it may be up for a short period of consolidation as the market awaits a fresh catalyst, with oil-market dynamics likely to drive some directional impetus at the margin. Additionally, the market will also keep an eye on today’s US CPI data, which hold the potential to drive broader market sentiment into the weekend.

Chile: Ahead of the US inflation data later today, the USD appears to have stabilised. The risk is that inflation surprises to the topside and prompts speculation that the Fed may bring forward any timing of a rate hike. Following on from the sharp jump in producer prices in China to a 26 year high, and inflation is a definite concern for investors. It will likely detract from household disposable income and will be growth negative. Equity markets have come under pressure, and overall risk aversion levels are a little higher this morning. EM currencies are on the defensive, and the USD will likely hold its station until the data is released.

Peru: While the broader Latam currency basket rallied on Tuesday, on the back of a weaker dollar and improved risk sentiment, the PEN ended the day relatively flat as the consolidative bias in the currency persists. According to Bloomberg data, the PEN closed the day at 4.1015, 0.02% weaker than the previous session’s close. Ahead of the all-important BCRP rate decision tomorrow evening, we expect the PEN to continue to trade in a tight range. Heading into the meeting, we see the risks skewed in favour of the central bank adopting a more hawkish policy stance as inflation continues to run how. From a currency perspective, a more aggressive stance from the BCRP tomorrow night should offer the PEN some support.

Fixed Income: Inflation expectations in Mexico continue to rise, but to a lesser degree than in Bazil

Brazil: There is no shortage of impetus for Brazilian markets this week, given all the developments on the fiscal and monetary policy front. Although Brazil’s fiscal outlook continues to deteriorate amid growing signs that the controversial Precatorios bill will be passed into law, longer-dated Brazilian bond yields traded lower yesterday. Note that while the changes to the spending cap rule will have a significant impact on Brazil’s fiscal trajectory, fears are mounting that the failure to pass the Precatorios bill will result in an even more dissenting impact on the country’s public finances. For context, the 10yr yield ended the session 13bps lower at 11.63%, according to Bloomberg data. Partly driven by the appreciation in the currency, which helped calm inflation fears, yields on the front end of the curve also traded lower yesterday with the 2yr yield for instance shedding 19bps to end the day at 12.14%.

Mexico: Mexican bond yields edged lower yesterday, in line with the broader trend seen across EM markets and the decline in US Treasuries, which fell to a seven-week low. The 2yr bond yield was an exception on the day, ticking marginally higher by 3bps to 6.87% as investors responded to inflation near a four-year high and revised their inflation forecasts higher for the months ahead. This was seen when looking at the 2yr break-even rate, which climbed to 4.835% yesterday, after trending off its record peak of 5.084% at the start of the month. For context, the 2yr break-even rate rose by more than 170bps since the start of the year. The market is pricing in less inflationary pressure than its peer, Brazil, with its 2yr break-even rate trading at 6.764%, up more than 325bps since January 2021.

Colombia: The bull-steepening bias of the start of the week persisted into Tuesday, with the 2-year yield leading declines with an 8bps move yesterday. Last week’s softer-than-expected CPI print caught the market off-guard, with investors also having to digest commentary provided by the finance minister and BanRep governor yesterday. Looking ahead, the focus will shift to external developments today, with the US CPI data likely to drive market sentiment in the session ahead.

Chile: Looking at the shape of the bond curve this morning ahead of the open we see the 2032 vs 2023 holding around 88 bpts according to Bloomberg data. This is off the lows of 77 bpts seen at the start of October but we are certainly off the highs of 321 bpts seen in at the start of August. In terms of outright levels, bonds improved strongly yesterday following news of the 4th pension fund withdrawal failure which recalibrated the risk of bond liquidations to fund redemptions. Looking ahead, we favour pressure to remain an overarching theme as investors price for political and in turn fiscal risk for the belly and long dates, while the near end of the curve will undoubtedly be focusing on the tightening of monetary policy. Investors are reminded that the Treasury will be selling $230.8m worth of CPI linked bonds due 2028 and then the same amount for the 2030’s on offer as well.

Peru: The flattening in Peru’s bond curve came to a halt yesterday as an escalation in political uncertainty drove up yields on the long end of the curve. In the latest blow for the new government, which took office just three months ago, Defence Minister Walter Ayala announced his resignation over Twitter on Tuesday. The stepping down of Minister Ayala is the latest in a string of resignations that includes the former head of the Cabinet of President Pedro Castillo and former Interior Minister Luis Barranzuela to name a few. Concerns have intensified that the new Cabinet is a government of beginners. The escalation in political uncertainty saw Peru’s 2031 bond yield climb 6bps on Tuesday to end the session at 5.81%. With investors sitting on their hands ahead of tomorrow night’s central bank rate decision, it is not surprising to note that the shorter-dated 2yr yield continued to trade in a tight range.