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05 July 2019 by jbchevrel

Brazil has been outperforming its EM peers on the day, largely on the back on expectations around the social security reform. The reform has moved forward in the Congress with the approval of the report in the Special Committee by a large majority of 36 votes vs 13 against. For reference, the reform is projected to add cBRL900B (i.e. €210B) into the economy over the next 10 years. The outperformance had effectively happened yesterday in stocks and FX, but CDS was not trading due to July 4. It is noteworthy that this version is a ‘diluted’ compared to the original Bolsonaro’s plan, which was to save around one third more (cBRL1.2T over 10 years). Nevertheless, the package’s size is roughly twice the size of the one that had been proposed by previous President Temer (cBRL450B from his initial cBRL850B). The difference between the two largely comes from the transition period (12 years compared with 20 years in Temer’s package). Timing matters. In addition, the minimum retirement ages of 65/62 went through too. The speaker of the Lower House, Rodrigo Maia, seemingly intends to take the social security reform proposal to the plenary of the Lower House next week. If this happens and they approve the reform before the recess, the CDS may tighten further and the short end may price a higher risk of a selic cut in July BCB meeting (July 31 – same day as FOMC). Brazil CDS thus tightened -2bp, which is nothing spectacular, especially compared to the c150bp we went through since the election period. However, that’s noteworthy that this move tighter was against a backdrop of wider EM spreads in general. Indeed, the CDX EM s31 widened +2bp back around 97%, Turkey 5y CDS is wider +6bp, along with South Africa, also +4.5bp. That broader market move wider was driven by a rates selloff in the US, which spilled over into global risk. We are talking +12bp on the 10y note yield and c20 points of SPX. The move might arguably have been emphasized by the fact that liquidity conditions aren’t optimal, as we are July 5. As far as the data itself, job growth bounced back from a weak 72K in May to a solid 224K in June, clearly above the Bloomberg’s consensus of 160K. Goods-producing industries added 37K jobs (17K mfg 21K construction). Services employment also bounced +154K pushed by business +51K & education/healthcare +61K. Average hourly earnings increased 0.22%MoM in June, below consensus of 0.3%, but the May reading was revised up to 0.32%. Net net, the year-on-year wage growth was unchanged at 3.1%YoY, and the unemployment rate unexpectedly rose to 3.7% (from 3.6%).