21 May, 2014

LatAm Fixed Income & Economics Daily (5/20)

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Brazil: Taking another hike off the table

Our local economics team officially changed its expectation to no hike at next week’s Copom (see below), and after yesterday’s benign IGP-M (-0.04% m/m), seemingly so did the market. Our economists, the median of the Central Bank’s Focus survey and the market (with just 7 bps priced) are all expecting no change to the Selic next week — making anything otherwise a major surprise that we think the Copom will not want to deliver. In turn, daily inflation readings and soft activity prints are giving the market more conviction, allowing for rates to tighten. DIs were tighter at the start and then remained relatively calm most of the day, closing some 4-6 bps across most of the curve. We are still recommending Jan-16 receivers (targeting 11.55% offshore), and we also like the '21s on the long end of the NTNF curve.

In this week's Central Bank Focus survey, there was a modest increase in inflation expectations for 2014 to 6.43% from 6.39%, while the estimate for 2015 was kept unchanged, at 6%. Conversely, the GDP estimate was revised downward to just 1.62%, although 2015 was raised to an even 2% growth. With respect to monetary policy, the consensus expects the Selic to end the year at 11.25%, with an additional 75 bps of hikes in 2015, to 12%. For next week’s Copom, expectations are for no change in the Selic. Note that the top five analysts in the survey revised their year-end Selic forecast to 11.5% from 11.75%, while keeping an aggressive 13% for 2015.

Lastly, a new election survey by Ibope is currently under way, with the results likely out Thursday evening. We expect this could be a market driver later in the week, although the expected outcome of the survey is unclear considering recent protests and an increase in ads coming from the PT.

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