EM LATAM CREDIT: Argentina: Current Account Deficit - Neutral
(ARGENT; Caa3pos/CCC/CCC+)
"Despite the dollar outflow, the government downplays the deficit in its external accounts and denies a possible devaluation." - Ambito
A devaluation may not be supportive in reducing inflation so it is not likely an option the government is considering, in our view.
The current account deficit data was released last week so the market is already well aware of the issue. A significant portion of the deficit is coming from an increase in Argentine tourism abroad, partially influenced by a strong ARS.
The strong ARS is likely hindering a build up of reserves as the country's exports are not as competitive as they could be thereby insufficient hard currency is earned.
Still, we think the country is on the right track in prioritizing reduced inflation and meanwhile incentivizing investment and an efficient economy through free market reforms but the fruit of those efforts is more longer term.
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OPTIONS: Broken Put Ladder In Schatz, Euribor Midcurve Package Feature
Wednesday's Europe rates/bond options flow included:
- DUQ5 107.40/107.30/106.90 broken put ladder -0.5 (receive) in 7k.
- SFIZ5 96.20/96.30cs vs 95.95/95.85ps, bought the cs for 1.5 in 4k.
- ERZ5 98.12/98.00/97.87 put ladder paper paid 1.5 on 2.5K
- ERH6 98.12/98.25/98.37/98.50 call condor vs. 98.00/97.87 put spread paper paid 0.5 on 5K, buying the call condor
- As a package:
- 0RU5 98.37/98.81cs, bought for 7.5 in 10k.
- 0RM5 98.25c, sold at 7.5 in 4.75k.
- 0RU5 98.12p, sold at 11.5 in 3k.
FED: US TSY 5Y AUCTION: NON-COMP BIDS $114 MLN FROM $70.000 BLN TOTAL
- US TSY 5Y AUCTION: NON-COMP BIDS $114 MLN FROM $70.000 BLN TOTAL
ECB: Mortgage Rates To Drag On Consumption Until At Least 2030 – ECB Staff
ECB staff posted a blog today noting that the drag on consumption from mortgage rates could last “at least until 2030”. It follows ECB Chief Economist Lane on May 23 giving a presentation that included prior monetary policy tightening seeing a mean drag across six models on HICP inflation worth a little over 2.5pps in 2025 which then narrows to closer to a still large 2.0pps in 2027.
- “About a quarter of mortgages in the euro area are pure ARMs. […] The remaining lion’s share are FRMs. By design, many have been shielded from changes in the policy rate thus far.”
- “Around 10% of all mortgages are FRMs which will reprice to higher rates within the next three years. A further 20% will do so by 2030.”
- There is also “significant cross-country heterogeneity, with ARMs more prevalent in Spain and Italy and FRMs more common in France and Germany.”
- On differences in mortgage structure across the income distribution: “For households in the lowest 20% of the income distribution, 32% of mortgages are ARMs, compared with 17% for the highest quintile. This makes them more exposed to interest rate risk in the coming years than higher-income ones.”
- “By 2030, the rate paid by lower-income borrowers will still have increased more – mostly because higher-income borrowers will still hold a greater share of long-fixation-period mortgages which won’t be repriced by then.”
