As I write this, the market is assigning an 80% chance that the Fed hikes by 100 bps at the July 27th meeting. I think that tomorrow’s Michigan survey on inflation expectations could tip the scales in either direction. Consensus expects 5.3% for 1-year and 3% for 5 to 10-years. A print above those would likely tilt the Fed to do a 100 bps, while a print below would favor a 75 bps increase. So, keep your eye out tomorrow morning at 10am for the verdict, as it is the last important inflation reading before the next meeting.
Importantly, however, terminal Fed Funds expectations have not changed much at all. They sit at 3.55% right now, which is only 8 bps higher than were they were last Friday. That means that the market is only front loading the hikes rather than anticipating more of them. To be sure, the market is already pricing in a rate cut by July. But like I have said before, the market is almost always wrong about what the Fed will do past the next meeting.
Insigneo’s Chief Investment Officer
In the latest data displayed by the weekly CADEM survey, the rejection voting option in the upcoming September 4 has continued to gain steam, setting itself ahead of the approval option. As of the latest data, the rejection option had a 51% of the vote intention, whereas the approval stood at 34%.
According to analysts, the behavior of the rejection rate is positively correlated to the approval rate of the Chilean president Gabriel Boric. Considering that the positive rating for Boric has lost momentum, some are starting to believe that the possibility of the approval to regain its footing is becoming less and less probable as time goes by. The latter, considering that the macroeconomic situation in Chile is growing more challenging by the hour: inflation continues to ramp up, hence forcing the hand of the Central Bank to continue hiking its monetary policy rate to control it. This scenery has also dented on consumption, with the latest print of retail sales falling 5.6% YoY.
Against this backdrop, it is worth highlighting that on July 5, the Constitutional Convention finalized its task and presented the new constitution draft to the President. The discussion on the new constitution that will be presented for the Chileans to vote on September 4 will probably occur amid rising polarization, considering that the referendum will only include two voting options, and that, given the correlation I previously mentioned, it is more likely that those who side with rejection will not be as negatively judged as they would have some weeks ago. This polarized background could also add on to the volatility observed in the local markets, given that investors have no certainty on what could happen if the new constitution is eventually rejected in September.
Furthermore, and a day before the Constitutional Convention presented its final draft to the President, the government unveiled its tax reform proposal that intends to raise ~4.1% of GDP in additional tax revenues in the next four years. The reform, which is divided into three projects, will have its first part presented this week to the Chamber of Deputies, with the focus of the first part being on proposed changes to the income tax, wealth, and everything in relation to evasions and exemptions. Another part that will change the mining royalty and is expected to include a tax on sales and on operating income is currently in the Senate, whereas the last part, which addresses green taxes, is expected to enter Congress towards the end of 2022.
The situation remains unclear in Chile, with a challenging macroeconomic backdrop denting on President Boric’s positive image and giving the rejection vote a higher voice facing the September 4 referendum. For now, markets will be vigilant on the Congress’ opinion on the first two parts of the tax reform, as well as the effect that the positive news from the fiscal front – namely a narrowing of the 12-month fiscal deficit – could have on the performance of the local assets.
Insigneo’s Chief Investment Officer