OVERNIGHT NEWS
# Risk assets and currencies bid after dovish Fed taper. Reduction in bond purchases by $15bn pcm to start this month, 5y/30y UST re-steepens on ‘inflation transitory’ view. Powell says premature to raise rates, can be patient. Will not hesitate to respond to inflation. SG calls first rate increase in Dec-22.
# Day ahead: BoE SG f/c unchanged bank rate and Gilt purchases, Czech NB f/c to tighten by 50bp to 2.0%, Norges Bk f/c to keep rate on hold at 0.25%, OPEC+ meeting on production quota.
# Germany September new industry orders increase 1.3% m/m (9.7% yoy), foreign orders +6.3%, domestic orders down 5.9%.
# Nikkei +0.9%, EUR 10y IRS unch at 0.21%, Brent crude -0.6% at $81.5/b, Gold +0.5% at $1,774/oz
BoE: 15bp rate increase priced in today, 100bp in next 10 months (OIS implied)
COLOMBIA
Banco de la República’s Technical Team expects core inflation to reach 2.5% at the end of 2021 and rise to 3.9% in 2022. According to the most recent Monetary Policy Report of Banco de la República, total inflation would reach 4.9% and 3.6% by the end of 2021 and 2022, respectively. For the same dates, core inflation (excluding food and regulated items: SAR) would stand at 2.5% and 3.9%, an increase explained, in part, by transitory shocks associated with the effects of tax measures, such as days without value added tax (VAT). However, these estimates maintain a wide margin of uncertainty associated, partially, with the magnitude of excess productive capacity in the economy and the speed with which they continue to be reduced. Also, due to greater volatility in prices and in their measurement due to the extension of the health emergency and the tax reliefs approved in the Social Investment Law (eg: days without VAT), facts that make it difficult to estimate core inflation on the forecast horizon. Finally, due to the risk that the greater persistence of supply shocks will affect inflation expectations or induce an increase in the indexation of some CPI baskets with respect to what is contemplated in the forecast.
Banco de la República’s Technical Team estimates that the current account deficit will drop from 5.3% of GDP in 2021 to 4.6% of GDP in 2022. According to the Monetary Policy Report, the growth in imports during the year would be explained by the recovery in consumption and investment and, to a lesser extent, by the rebound in Colombian trips abroad and the purchases of vaccines against the Covid-19. In addition, the high international costs of maritime transport of goods and world prices of products and inputs, caused among other reasons by disruptions in global supply chains, would increase the nominal value of external purchases. The current account deficit would also widen due to the expected annual rebound in the profits of companies with foreign equity participation, a consequence of both increased economic activity and the high prices of coal and oil. For its part, the country’s external income would recover during the year, partially offsetting the pressures on the external imbalance.
Expected path of rates from BanRep Staff is higher than the one estimated by market analysts in October, of a repo rate of 2.5% for December of this year. According to the Monetary Policy Report, the median policy interest rate expected by analysts at the end of 2021 and 2022 is 2.3% and 4.0%, respectively. In the monthly survey of expectations carried out by Banco de la República and applied to analysts in October, the median of the responses places the intervention interest rate at 2.3% for the average of the fourth quarter of 2021 (2.5% for the median at the end of December 2021). The survey indicates that the policy rate would stand at 2.8% at the beginning of 2022 and that it would close at 4.0% at the end of that year. At the end of the forecast horizon (eight quarters), the median of the analysts stands at 4.5%. On the forecast horizon, the Technical Team anticipates a higher inflation path, largely due to transitory supply shocks and lower excess production capacity than anticipated in the July Monetary Policy Report, which is consistent with an expected path of reference interest rates that, on average, is somewhat higher than that implicit in the previous report and that expected by market analysts in October of this year.
Latin America:
Currency performance in the region ended mixed amid weaker commodity prices, despite a weaker dollar after the Fed meeting. BRL and MXN benefited the most from a weaker dollar. MXN appreciated 0.8% to 20.6164, while BRL appreciated 2.1% to 5.5693, largely into the close, amid some speculative flows ahead of this week’s precatorios bill vote. BCB minutes came out with a slightly more hawkish tone. COP was the key underperformer, depreciating by 0.9% to 3832.10, weighed down by a sharp 4.0% decline in brent crude oil to $81.31 during the session. CLP and PEN were mostly unchanged.
In local rates, Brazil DIs outperformed, ending 37bp to 56bp lower across the curve, with Jan 28s 56bp lower at 12.08%. Mexico TIIE rates also ended lower by 4-6bp, with the 10y ending 5bp lower at 7.72%. In Colombia, COPxIBR rates shifted higher during the session by roughly 18-24bp across the curve, with the 5y ending 21bp higher to 6.225%