COP – Similar to other Latam currencies, COP experienced large volatility during U.S. CPI release and weakened in the morning session. The price action was choppy and weaker December data added to the price action. Manufacturing Production YoY printed at 0.5% (BBG 3.0%, prior 4.5%), Industrial Production YoY at 0.7% (prior 2.5%), Retail Sales YoY at -1.8% (BBG 1.0%, prior 1.7%), and trade deficit widened to $935.2M (BBG $800M, prior $1114.9M). Looking ahead, we will have Q4 GDP data tomorrow (BBG -0.3%, prior 1.6%). Flow wise, our local traders saw some COP buying interests from Corps and Real Money names. Interest from fast money has been a clear driver for the underperformance, while corporate inflows continue to somewhat provide liquidity or support the currency. On local news, health reform bill was presented to Congress yesterday and we expect changes and pushback from congress. Demonstrations in support of the health bill are scheduled for today. President Petro will address them from the presidential palace balcony today at 4 PM PST. Opposition has called for an anti-government demonstration tomorrow. Apart from the action on the streets, which usually don’t affect prices, what analysts will be looking at is possible costs on the newly presented reform and expenditure bill.
Markets are mixed at the mid-week point, though risk remains on the backfoot post US CPI. AUD underperformance was driven by vulnerable long positioning to USD strength, no impetus from Governor Lowe and ahead of the labor market report. Gilts outperform after UK inflation fell short of expectations, causing a nasty but justified repricing in the front end. Data remains the key driver of markets and so we caution that US retail sales could add to the goldilocks narrative today. Our economists expect a strong rebound in January at 08:30 EST while UST supply will come into focus with the 20y auction.
Emerging markets are following the tone set more broadly but there are local developments under the surface. South Africa CPI was in line but retail sales underwhelm, while PLN saw some signs of disinflation. Q4 GDP data is due for PEN and COP today, but political headlines may be the bigger focus elsewhere. BRL markets will take note that a change to the BCB inflation target is not imminent (Thursday) after Finance Minister Haddad confirmed as much, while ILS is on headline watch.
January US CPI meets expectations for a strong print; USTs bear-flatten, market terminal rate pricing reaches 5.30%; Fed’s Williams says year-end rates at 5.0-5.5% is right framing; Solid UK wage growth spurs sharp gilt bear-flattening; BRL sways, 2023 CPI target in focus; US 10y at 3.743% (+4.2bp).
Latin America:
The performance of Latam currencies was somewhat mixed throughout the session, as EM risk appetite deteriorated after the release of the US CPI print. CLP and MXN each rallied, by ~1% and ~0.3% respectively, as regional headlines remained relatively quiet. BRL was the laggard in the region, down ~1.3% intraday as a local media report highlighted President Lula would favor a 100bp increase in the 2023 CPI target. However, the currency retraced some of its losses and closed ~0.4% weaker as subsequent reports denied this information. Local rates followed US Treasuries higher, with significant pressure in the long end of the TIIE and IBR curves; 10y TIIE closed 16bp higher, while 10y IBR closed 13bp higher. In Brazil, the DI curve bull-steepened after the release of the media reports related to a potential change in the CPI target; January 2025 DIs rallied 11bp (to 12.86%) and January 2031s sold off by 6bp (to 13.55%). Market participants in Brazil remain focused on the February 16 meeting of the National Monetary Council (CMN), where a potential revision higher of Brazil’s CPI target could be on the table.