July 7, 2017 / 3:05 PM / a year ago

EMERGING MARKETS-Brazil rate futures slip as deflation stokes rate-cut bets

    By Bruno Federowski
    SAO PAULO, July 7 (Reuters) - Yields on short-term Brazilian
interest rate futures fell on Friday after monthly consumer
prices declined for the first time in 11 years, bolstering the
case for a sharp rate cut this month.
    Prices as measured by the benchmark IPCA index fell 0.23
percent in June, the sharpest drop since August 1998. The annual
inflation rate fell to 3.00 percent, at the bottom end of the
central bank's target band of 4.5 percent plus or minus 1.5
percentage point.
    A weaker-than-expected economic recovery has weighed on
Brazilian inflation and allowed the central bank to cut the
benchmark Selic rate from its highest level in eight years.
    The bank has been signaling since its last policy meeting
that it could reduce the pace of rate cuts to 75 basis points
per meeting, from the current 100 basis points, because of
growing political uncertainty.
    Those bets lost some steam after the IPCA release.
Rate-future yields indicated traders saw a 70 percent chance of
a 100 basis-point cut to 9.25 percent at the central bank's July
meeting, with a 30 percent chance of a slower 75 basis-point
reduction. Bets were evenly split on Thursday.
    The Brazilian real strengthened 0.3 percent, in line
with Latin American currencies such as Mexico's and
Colombia's pesos.
    Demand for emerging market assets rose after a report showed
stubbornly sluggish U.S. wage growth in June despite
stronger-than-expected jobs growth.
    The report was the latest in a batch of mixed economic
indicators that have left traders skeptical over the Federal
Reserve's plan to increase rates once more this year and three
times next year.
    A slower pace of rate hikes would support the allure of
emerging markets, which offer higher yields. Still, the Chilean
peso slipped 0.1 percent, tracking a decline in prices
of copper, a key export.

    Key Latin American stock indexes and currencies at 1445 GMT:
 Stock indexes                                daily %    YTD %
                                     Latest    change   change
 MSCI Emerging Markets               1002.74    -0.34    16.69
 MSCI LatAm                          2542.48     0.53     8.05
 Brazil Bovespa                     62547.58     0.12     3.85
 Mexico S&P/BVM IPC                 49798.88    -0.43     9.11
 Chile IPSA                          4833.63     0.03    16.43
 Chile IGPA                         24189.42     0.05    16.66
 Argentina MerVal                   22094.57    -0.58    30.60
 Colombia IGBC                      10886.76    -1.14     7.49
 Venezuela IBC                     123864.70     0.09   290.68
 Currencies                                   daily %    YTD %
                                               change   change
 Brazil real                          3.2898     0.25    -1.23
 Mexico peso                         18.1560     0.51    14.25
 Chile peso                            666.4    -0.14     0.65
 Colombia peso                       3089.93     0.16    -2.86
 Peru sol                              3.249     0.12     5.08
 Argentina peso (interbank)          16.9700     0.77    -6.45
 Argentina peso (parallel)             17.16     0.52    -1.98

 (Reporting by Bruno Federowski; Editing by Meredith Mazzilli)
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