Since the half-sanction given by the Chamber of Deputies to the National Government’s “Bases Law” project, sovereign bonds, which accumulated increases of 10% on average in April, remain stable and the composition of portfolios has also changed.
A week ago everyone was a seller of the CER Bonds and was enthusiastic about the Capitalization Letters (Lecap) that pay a fixed rate. After the drop in interest rates, investors decided to be unfaithful to Lecap, which yields 3.6% and rose 19% last month.
The return to CER bonds is explained by the fact that it is difficult to believe that in the coming months inflation will reach levels below 4 percent.
The other good news that the Ministry of Economy received was the cessation of the rains and the lifting of the oil workers’ strike. On Friday, 1,000 more trucks entered the ports than the previous day and the export levels of April 2022 were equal. Soybeans were the star, concentrating 82% of shipments.
“The expectation is that the crawling peg remains at 2% during May and possibly also in June, seeking to consolidate the slowdown in inflation” (AdCap)
The report from Adcap Grupo Financiero points out that “with the start of the thick harvest, which was somewhat delayed by the rains, payments have already begun to normalize, but still very gradually. The expectation is that the crawling peg (dollar float) remains at 2% during May and possibly also in June, seeking to consolidate the slowdown in inflation. To help anchor expectations, the futures market continues to validate December 2024 at around $1,205 per dollar.”
What everyone agrees on is that financial dollars began to worry and rose more than 6% last week. According to Adcap, the cash with settlement (CCL) “rebounded due to concerns related to the war in Israel and the appreciation of the dollar against the other currencies of the world that made the Brazilian currency jump to 5 reais per dollar.”
The report adds: “during April we saw lower daily purchases by the Central Bank and we hope to see a normalization of import payments during May, so that Central Bank purchases return to levels between US$50 and US$100 million per day. Regarding the amount of pesos, we continue to see strong conviction in reducing the fiscal deficit. For the moment, we believe that the stocks remain without major changes and that puts a floor on the exchange gap.”
For its part, the consulting firm F2 of Andrés Reschini says in a report that in light of weak US employment data, “the market raises the chances of a rate cut by the Federal Reserve for September, but also for December. This, together with good quarterly balances, left the week ending with increases in the main indices thanks to a weaker dollar and a marginal drop in US Treasury debt yields. In addition, there are the best data for the Chinese economy that puts upward pressure on soybeans.”
In another part of the report, it is considered “very likely that the fall in the volume of settlements is the main factor for the rise in the CCL, although the gap with the official exchange rate remains below 30% and for now does not worry the market. The Central Bank’s net reserves would have ended up around -USD 2.7 billion while the threat of non-renewal of the swap with China appears on the scene, which would force the disbursement of about USD 5 billion. China’s toughness is believed to be to negotiate. Few are betting that this swap will end up being paid. But, in the meantime, the possibility is a threat.”
Regarding what will happen to the dollar, F2 indicates that “for now the market seems to be surrendering to a historic appreciation destiny for the local currency, seduced by the success of the first steps of the Milei management.” However, he warns, “there is still a lot to be done both institutionally (Congress) and in cleaning up the excess pesos from the Central Bank. Furthermore, he must demonstrate that the fiscal balance and disinflation path are sustainable without bogging down growth. And since there is a very challenging global context, although the challenge is not impossible, there is no guaranteed success either.”
EconViews highlights for its part that “on a macro level, the Government surprised the market with a second rate cut in two weeks. This has two aspects: continue cleaning the Central Bank’s balance sheet. Milei is concerned (perhaps too much) about the amount of money that the BCRA prints, so the rate reduction limits interest payments. The second lever is to try to make credit one of the variables that help boost the ailing activity. This is much more interesting. Banks need to go out and lend since the banks will not generate the profits they generated in previous years and the stock of credit in pesos is barely 4% of GDP, climbing to 5% if loans in foreign currency are included. That is to say, it is a deleveraged society. If indeed we hit the bottom in March, demand for credit should begin to appear. The downside of lowering rates is that it is increasingly difficult to get out of the trap, unless inflation drops a lot and this rate is not so negative. The idea is that when the stocks are released, the interest rate has to be positive, to reduce the demand for dollars.”
According to this consultancy, “inflation in May will be lower than what it would have been with increases in public service rates. We believe it could be 7%, but this is not a genuine reduction in inflation, but rather repression. Eventually the May increase will come later, so it’s a little more bread for today, hunger for tomorrow.” For Econviews, the current policy “is reminiscent of times not too distant. In fact, the Government proposed a scheme and soon changed it.”
“Inflation in May will be lower than what it would have been with increases in public service rates. It may be 7%, but it is not a genuine reduction in inflation, but rather repression” (Econviews)
The consulting firm 1816 does not believe that the debt with importers has grown too much in April. Some estimate the increase was USD 11 billion. The report adds that “the Central acquired USD 3.3 billion in all of April and the net purchases of what was settled by CIARA (the Oil Chamber) were USD 1.4 billion, the second largest amount in history. If it is not because of agriculture and the debt of importers, why does the Central Bank continue to buy so many dollars?” he asks. And he answers: “our hypothesis is that it is due in part to the financing in dollars that banks are giving to local companies, which settle those dollars in the Free Exchange Market (MLC). Between March and April alone, the local stock of dollar loans increased by USD 2 billion (+55%).”
According to 1816, there is a virtuous circle: “deposits in dollars increase, banks no longer fear a run so much (then they do not have cash in dollars for 100% of the deposits), export companies take the opportunity to finance themselves in dollars and the Central Bank buy foreign currency.”
Another fact that the consulting firm highlights is that “the stock of loans in dollars for card consumption reached its highest levels since 2018 last week, a symptom that Argentina is beginning to be somewhat expensive. The 3 main wage indices show real wage rebounds.” And regarding the postponement of the rate increase, it suggests that the decision was made because perhaps the Government is betting on 5% inflation in May, which will bring new rate cuts.
The doubts of investors after the reduction in rates and the suspension of the rate increase are added to those they maintain about the approval of the Bases Law and the fiscal package. For this reason, caution is expected this week, although there will be more movement in the Stock Market, as the most important balances begin to enter.
