Weekly Latin America Risk Monitor

As usual, we’re keeping it brief. Email us at if you’d like to dialogue further on anything you see below.

PRICES

Across Latin American equity markets, Venezuela continues to outperform, closing up +7.1% wk/wk and up +52.4% YTD (vs. regional median of -14.2%). Interestingly, Venezuela’s Stock Market Index remains the only country index in the world that remains bullish from a TRADE and TREND perspective in our quantitative models. 

Slowing Growth and Deflating the Inflation are weighing on interest rate expectations across Latin American currency and fixed income markets, with the Brazilian real and Mexican peso declining -2.2% and -2.6% wk/wk, respectively; Brazil’s 2yr sovereign debt yields fell -43bps wk/wk alongside a -16bps decline in Mexican 2yr sovereign debt yields. CDS shot up broadly across the region, but not to levels we’d consider noteworthy from a change in credit quality perspective.

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KEY CALLOUTS

Brazil

-Despite record-low unemployment for the month, retail sales growth slowed in June to +9.5% YoY. Though we remain the bears on Brazilian equities, we were out last week with a detailed report on what we’d like to see to turn constructive – email us for a copy of the presentation.

-Though Brazilian home price growth slowed in July to +2.1% MoM, the absolute level of growth continues be a thorn in the central bank’s side. At only ~1% of GDP, however, it will be tough to meaningfully slow the structural demand for mortgages and homeownership in Brazil over the long-term TAIL.

-According to the latest National Industrial Confederation (CNI) poll, President Rousseff’s approval rating has taken a -600bps hit (to 67%) since March, largely due to the sticky Stagflation continuing to grip the Brazilian economy. In fact, the percentage of respondents disapproving of the government’s efforts to control inflation rose +1,400bps to 56% since the survey last took place.

-Despite growing discontent with the central bank’s relative inaction on addressing what continues to be higher-highs in Brazil’s reported inflation readings, president Alexandre Tombini reaffirmed the government’s commitment to reaching the mid-point of their official CPI target of +4.5% (vs. +6.9% YoY currently) by the end of next year. From an intermediate-term perspective, we think Brazilian inflation peaks in August on a YoY basis. From a longer-term perspective, we do not see them achieving the stated objective absent a material slowdown in Brazilian economic growth.

Mexico

-CPI accelerated in July on both a YoY and MoM basis to +3.6% YoY and +0.48%, respectively. The Mexican bond market continues to believe in the ability of central bank president Ron Carstens to avoid a serious bout with inflation despite record-low interest rates and Indefinitely Dovish policy, as expectations for an interest rate hike continue to be extended well into next year (Sept. ’12 based on TIIE futures).  We remain the bears on the Mexican peso (MXN).

-Banco de Mexico confirmed our view of the Mexican economy by lowering its forecast for 2011 and 2012 YoY GDP growth to 3.8-4.8% (vs. 4-5% prior) and 3.5-4.5% (vs. 3.8-4.8% prior), respectively.  The bank maintained its 2011 and 2012 YoY CPI forecasts of 4-5% apiece. Expectations of slower growth and flat-to-declining inflation expectations continue to support the bull market in Mexican peso bonds.

Chile

-Central bank president Jose De Gregorio confirmed our view that Chilean economic growth is slowing by officially stating that Chilean GDP growth is likely to approach trend-line levels by years-end (~4%).

-Inflation slowed in July to +2.9% YoY, which gives Banco Central de Chile the cover to remain on hold with their benchmark interest rate (currently at 5.25%).

Colombia

-Accountability you can believe in: finance minister Juan Carlos Echeverry offered to resign if the country’s unemployment rate didn’t fall to single digits by year-end (currently at 10.9%). Though we don’t have a call here on the slope of Colombian unemployment, we continue to admire the courage and leadership out of their policy makers. Both monetary policy and fiscal policy remain key leading indicators for growth and inflation in our model.

Peru

-Peru’s central bank, led by the recently reappointed Julio Velarde, kept its benchmark interest rate on hold at 4.25% amid slowing domestic and global economic growth.

Darius Dale

Analyst