July 7, 2017 / 9:06 PM / a year ago

EMERGING MARKETS-Brazil rate future yields slip as consumer prices decline

 (Updates prices)
    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 roughly 60 percent
chance of a 100 basis-point cut to 9.25 percent at the central
bank's July meeting, with a 39 percent chance of a slower 75
basis-point reduction. Bets were evenly split on Thursday.

    The Brazilian real strengthened 0.58 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.
    Key Latin American stock indexes and currencies at 2046 GMT:
 Stock indexes                           daily %     YTD %
                             Latest       change    change
 MSCI Emerging Markets         1003.51     -0.26     16.69
 MSCI LatAm                    2551.04      0.86      8.05
 Brazil Bovespa               62350.51     -0.19      3.53
 Mexico S&P/BMV IPC           50038.33      0.05      9.63
 Chile IPSA                    4859.81      0.57     17.06
 Chile IGPA                   24306.49      0.54     17.23
 Argentina MerVal             22004.71     -0.98     30.07
 Colombia IGBC                10936.79     -0.68      7.98
 Venezuela IBC               123451.19     -0.24    289.37
 Currencies                              daily %     YTD %
                                          change    change
 Brazil real                    3.2809      0.58     -0.97
 Mexico peso                   18.0865      0.89     14.69
 Chile peso                     667.15     -0.25      0.53
 Colombia peso                    3090      0.16     -2.86
 Peru sol                        3.253      0.00      4.95
 Argentina peso                16.9700      0.77     -6.45
 Argentina peso                  17.15      0.58     -1.92
 (Reporting by Bruno Federowski; Editing by Meredith Mazzilli
and Tom Brown)
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