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Conclusion: Latin American JAN growth and inflation data continues to come in in-line with our views at the start of the year. Looking forward, however, the intermediate-term outlook has changed with the potential introduction of another round of The Bernank Tax.

 

PRICE SIGNALS

All % moves week-over-week unless otherwise specified.

  • EQUITIES:
    • Median: +3%
    • High: Peru +4.8%
    • Low: Venezuela +0.2%
    • Callout: Latin American equity markets are up +12% YTD on a median basis
  • FX (vs. USD):
    • Median: +1.6%
    • High: Mexican peso +2.4%
    • Low: Argentine peso flat wk/wk
    • Callout: Latin American currencies are up +8.2% vs. the USD YTD on a median bass
  • S/T SOVEREIGN DEBT (2YR YIELD):
    • High: Colombia/Mexico +2bps
    • Low: Brazil -2bps
    • Callout: Brazil -54bps YTD
  • L/T SOVEREIGN DEBT (10YR YIELD):
    • High: Mexico +16bps
    • Low: Colombia -2bps
    • Callout: Brazil +8bps YTD
  • SOVEREIGN YIELD SPREADS (10s-2s):
    • High: Mexico +14bps
    • Low: Colombia -4bps
    • Callout: Brazil +62bps YTD
  • 5YR CDS:
    • Median: -4.7%
    • High: Argentina -2.3%/-17bps
    • Low: Chile -6.5%/8bps
    • Callout: Latin American 5yr sovereign CDS have tightened -13.9% YTD on a median basis
  • 1YR O/S INTEREST RATE SWAPS:
    • Median: +2.8%
    • High: Colombia +6.3%/+32bps
    • Low: Brazil -0.7%/-7bps
    • Callout: Colombia +8.4%/+42bps YTD vs. Brazil -5.6%/-57bps
  • O/N INTERBANK RATES:
    • Median: flat wk/wk
    • High: Colombia +5.2%/+24bps
    • Low: Mexico -0.4%/-2bps
    • Callout: Brazil down -16.9%/-210bps over the last six months vs. Argentina +4.1%/+40bps
  • CORRELATION RISK: Globally-interconnected growth/inflation expectations continue to be priced into Latin American equity markets, based upon their 90% positive correlation to the 10yr U.S. Treasury Yield over the LTM.

Full price and performance tables can be found at the conclusion of this note.

CHARTS OF THE WEEK

The latest batch of PMI data shows Brazil improving, on the margin, relative to the other key economy in the region:

Weekly Latin America Risk Monitor: It’s February Now - 1

Argentina’s flurry of financial repression has achieved the desired results – for now:

Weekly Latin America Risk Monitor: It’s February Now - 2

The U.S. Dollar remains between the proverbial “rock and a hard place”, clouding the region’s intermediate-term growth/inflation/policy outlook:

Weekly Latin America Risk Monitor: It’s February Now - 3

KEY CALLOUTS

Growth – Growth across the region was fairly mixed in JAN, but easing speculation has been highly supportive of growth expectations and capital markets inflows:

  • Brazil: Both Manufacturing and Services PMI readings ticked up in JAN to 50.6 (vs. 49.1 prior) and 55 (vs. 54.8 prior), respectively. Export growth came in slightly faster in JAN as well: +6.1% YoY vs. +5.8%.
  • Brazil: Lower volatility across global financial markets have been supportive of EM FX in the YTD, as capital flows in the form of repatriated USD-debt issuance and foreign portfolio direct investment pick up after a subdued 2H11. Brazilian corporations issued $12.3B in USD-denominated paper in JAN alone and the real closed the month +6.7% higher vs. the dollar. A rising trend of selling existing bonds on which the paperwork has been previously filed indicates this rush by Brazilian corporations to secure financing while pricing conditions are favorable.
  • Mexico: Both Manufacturing and Services PMI readings ticked down in JAN to 51.8 (vs. 52 prior) and 51.7 (vs. 54.4 prior), respectively. On the consumer front, Confidence ticked up in JAN to 95.4 vs. 90.8 prior.
  • Chile: The country’s Economic Activity Index (proxy for GDP) accelerated in DEC to +5.3% YoY vs. +4% prior.
  • Colombia: The Urban Unemployment Rate ticked up in DEC to 10.4% vs. 10.3% prior.

Inflation – While reported inflation continues to trend down within the construct of our Deflating the Inflation II thesis, another round of The Bernank Tax is creating consternation within Latin American inflation expectations:

  • Argentina: Argentine inflation-linked bonds are having their best start to the year since 2009, after the IMF failed in its mission to get the country to improve the quality of its inflation statistics – suggesting that Argentina’s trend of dramatically underreporting CPI will continue indefinitely. The notes are up +9.6% YTD vs. +1.4% for similarly-structured Brazilian paper.
  • Colombia: CPI slowed in JAN to +3.5% YoY vs. +3.7%. We continue to look to the USD’s quantitative setup for clues as to what degree The Bernank Tax will limit any further downside/spur upside in LatAm inflation readings over the intermediate term.
  • Peru: CPI slowed in JAN to +4.2% YoY vs. +4.7% prior.

Policy – Latin American policy continues to be highly interventionist, particularly with regards to exchange rate management: 

  • Brazil: The central bank bought dollars in the FX forwards market for the first time since JUL last week, in an attempt to slow the real’s appreciation (+8.6% YTD through Friday).
  • Argentina: In what has become a near-weekly announcement of some new form of Big Government Intervention, the President Fernandez’s regime will require importers to seek authorization from the federal tax agency prior to purchasing goods abroad. The measure, which is another backdoor attempt at financial repression via keeping pesos from leaving the country, is estimated to slow production and create product scarcity among 5,500+ Argentinean producers – with the latter being supportive of even higher rates of structural inflation in Argentina (currently estimated at/above +25% YoY). While decidedly negative for Argentina’s long-term TAIL, the recent flurry of repressive measures have had the desired effect in the near term, however, with the benchmark Badlar rate falling to a four-month low of 14.75%.
  • Colombia: Banco de la Republica, the country’s central bank, announced that it will purchase a minimum $20M USD per day in auctions for at least three months to “boost the nation’s international reserves”. We interpret that as a bid to stem the rally in the peso, which is up +8.5% for the YTD.

MOSHE’S BRAZIL NUGGETS

Moshe Silver, our Chief Compliance Officer, is fluent in Portuguese and mines the local Brazilian press for hard-to-get data points for us each day. Below, we flag his top three callouts from the previous week:

  1. Brazil strengthens bank requirements – in the aftermath of the Banco PanAmericano fraud scandal, the central bank undertook an examination of the banking sector which has now resulted in a large number of small and mid-sized banks seeing their reserve requirements boosted, some by a significant amount.  The review is ongoing and bank authorities say further adjustments are likely.
  2. Real estate prices climb – building prices in Rio and SP, the nation’s two leading real estate markets, rose +1.2% and +1.3% MoM, respectively, in January, countering faltering price trends that have prevailed since September.  No reasons for the price rise were given in the reporting, but we note that the biggest price rises are from small buildings and one-bedroom apartments.  We speculate this corresponds to the recent trend among Brazilian business owners and executives who have been acquiring small pied a terre residences in the downtown areas of Rio and Sao Paulo, in order to avoid the multi-hour commutes.  A growing number of people who work in the cities have taken to living near their offices during the week, and retreating to their homes for weekends.
  3. Major appliance sales up – the government’s decision to reduce sales tax on major manufactured goods spurred demand for white goods.  Sales of refrigerators, ovens and washing machines were up 56% in December MoM, and up 30% YoY.  Demand continued strong through January, resulting in inventory shortfalls.  Retailers say there are not enough refrigerators to meet demand.

THE WEEK AHEAD

Key economic data releases and policy announcements:

  • TUES:
    • Chile: JAN Trade Data
    • Venezuela: JAN CPI
  • WED:
    • Brazil: JAN CPI (unofficial IGP-DI series)
    • Chile: JAN CPI
  • THURS:
    • Mexico: JAN CPI
    • Argentina: JAN CPI; JAN WPI
    • Colombia: JAN CPI; Monetary Policy Minutes
  • FRI:
  • THIS WEEKEND:
  • NEXT MON:
    • Mexico: DEC Industrial Production

Darius Dale

Analyst

Weekly Latin America Risk Monitor: It’s February Now - 4

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Weekly Latin America Risk Monitor: It’s February Now - 10