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Saturday, February 15, 2014

Markets celebrate new inflation index

Two women talk outside the INDEC headquarters in downtown Buenos Aires.
By Fermín Koop
Herald Staff
Bonds linked to consumer prices soar and the parallel dollar rate declines slightly

The federal government’s newly unveiled inflation index sparked a positive reaction in financial markets yesterday, as investors welcomed signs that the government had begun to report more credible economic data.

As expected, inflation-linked bonds, based on the CER inflation index, soared a day after the government unveiled a new consumer price methodology, seeing increases of as high as 25 percent in the Buenos Aires Stock Market before dropping slightly. The Discount bond in pesos, for example, ended the day with a 21-percent hike, followed by the PAR in pesos that rose 17.95 percent, the Cuasipar, with 14.80 percent and PR13, with 7.8 percent.

“Inflation-linked bonds reacted to the new price index with an overwhelming rise. There was a lot of euphoria just for the inflation announcement,” Alexander Zawadzki, a broker at Schweber, told the Herald. “I expect CER-linked bonds will continue growing next week but at a slower pace.”

The CER inflation index is devised by the Central Bank based on the government’s official numbers. Before yesterday that meant that it used the data from the INDEC that was widely believed to be fudged. Now, it will use the national urban consumer price index (IPCNu), which reported a 3.7 percent rate of inflation for January when compared to December, suggesting the government may be making good on its promise to stop lying about inflation.

Now that the INDEC has reported a higher inflation closer to the market expectations, bonds related to the CER inflation index are suddenly seen as a more attractive option for investors.

“Thanks to the new price index, bonds in pesos linked to the inflation rate have now become a much more appealing option for investors. Some people will continue to choose dollar bonds but the ones in pesos will get more fans,” Augusto Posleman, broker at Puente investment bank, told the Herald. “They will continue to increase but not as quickly as they did today.”

On the other hand, declines were registered in the most traded papers that are not directly related to the inflation rate. The Bonar X dropped 1.34 percent (896 pesos), the BDED soared 0.27 percent (750 pesos), the Boden 2015 dropped 1.85 percent (1,013 pesos) and GDP bond in dollars dropped 2.49 percent (88 pesos).

Economy Minister Axel Kicillof’s suggestion there could soon be a hike in electricity rates had a direct effect on the the Merval benchmark stock index, which rose 2.24 percent and closed at 6,056 points. Up to 69 million pesos were traded and increases were seen in most of the leading stocks, including Edenor with 7.77 percent, Pampa Energía (8.42 percent) and Petrobras Argentina (5.26 percent).

“The increase in the Merval can be explained due to rumours of a possible rate hike in electricity, which led to shares of electric companies to increase,” Posleman said. “The market is starting to see the government’s attempts to normalize the economy.”

The official dollar dropped two cents and closed at 7.78 pesos. On the other hand, the illegal dollar dropped 15 cents and closed at 11.85 pesos. A similar drop was experienced by the blue-chip swap, which declined 10 cents and closed at 10.77 pesos.

New price index

President Cristina Fernández de Kirchner’s administration unveiled on Thursday its long-awaited new national urban consumer price index (IPCNu), which reported a 3.7 percent increase in prices in January compared to December. The new index means that up to 200,000 products will be surveyed every day by 290 people in 13,000 stores nationwide.

The move is seen as a sign that the government is more serious about rebuilding its damaged relationship with the markets as well as the International Monetary Fund, which had censured Argentina for the inaccuracy of its official data.

The new index was welcomed by economists as an apparent “genuine effort” to narrow the gap between private estimates and official figures, which were widely discredited.

“All the markets were asking for the government to be honest about the inflation index. This will allow us to make a new approach to international markets,” Schweber said. “It really is a good measure.”

Along the same train of thought, Brokers at BNP Paribas said “credibility around this new inflation measure will need time to build up, but the first print was undeniably encouraging.”

Investors, however, will want to see more signs that change was permanent, analysts said.

“This really has to be accompanied by more signs of compromise,” said Management & Fit in a report. “(The government) is suffering from a severe lack of confidence that can only be resolved with time.”

@ferminkoop

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