Headwinds at Home and Abroad

A rough week for local assets, with both the external and domestic fronts working against them at the same time. Long-term U.S. yields held at their highs, but the punishment on Argentine debt went well beyond the global backdrop: hard dollar bonds plunged, country risk climbed above 600 bps and the Merval deepened its monthly decline. The week's data did not help. Activity fell sharply in July, leaving the economy on the verge of a technical recession, and poverty rebounded in the first half, adding a political risk factor one year ahead of the elections. The only positive note came from private wages, which once again outpaced inflation. Pressure was higher in the FX market: the official exchange rate picked up, financial dollars followed and the BCRA broke its buying streak, in a week in which reserves fell again. The peso curve ended mixed, with dollar-linked bonds leading on the back of the weaker peso, while the Treasury eased the end-of-month maturity through the swap of the September Lelink. This week the focus will be on the result of Monday's auction, the payment of the D30S6 and the second-quarter balance of payments, with Brazil's elections on Sunday as the regional backdrop.

1. Activity retreats

As anticipated by the poor readings in manufacturing and construction, the EMAE fell 2.9% m/m and 1.4% y/y in July, deepening the 0.6% q/q contraction of 2Q26. Only six sectors grew versus July last year, led by fishing and mining, while manufacturing, retail and construction fell between 3% and 5% y/y. In the first seven months, activity is up 1.7% y/y. That growth rests on the first-quarter rebound and on agriculture, mining and fishing, which are up more than 10% y/y, against manufacturing down 2.1% y/y and slight declines in construction and retail. However, activity contracted in four of those seven months, reinforcing what we have been anticipating: an economy with no engine of its own beyond the primary sectors, which this time also failed to hold it up. A slight improvement is expected for August and September, though it will hardly offset July's drop, raising the odds of another decline in 3Q26 and of a technical recession. With the most labor-intensive sectors increasingly lagging behind, there is less room to improve the public mood just as the 2027 electoral calendar begins to take shape.

2. Poverty rises

In the first half of the year poverty rose 4.1 pp to 32.3% of the population (15.0 M people) and extreme poverty rose 1.2 pp to 7.5% (3.5 M). The deterioration was driven by a weaker labor market, the decline in real wages and the acceleration of the basic baskets, which went from rising 26% y/y to 35% y/y. Even so, poverty remains below the 41.7% of the second half of 2023, with 4.3 M fewer people. The data adds a political risk factor for the Government one year ahead of the elections.

3. A slight improvement in wages

In July registered private-sector wages rose 2.3% m/m, above the 2.1% CPI, after matching inflation in June. Total registered wages advanced 2.5% m/m, driven by the public sector (3.0% m/m), and have now outpaced prices for two consecutive months. The improvement is not yet enough to recover lost ground: compared with a year ago, registered private wages are down 3.1% in real terms and total registered wages 2.8%. With wages only now picking up at the margin, consumption has yet to find firm momentum.

4. The BCRA breaks its buying streak

Agricultural exporters kept selling at a good pace, around USD 150 M per day, but the BCRA bought just USD 29 M during the week and did not intervene on Friday, ending a streak of 13 consecutive sessions of purchases. The pause came in a week of a more stressed dollar and a more turbulent international backdrop. September purchases total USD 232 M, about USD 12 M per session, compared with USD 38 M per day in August and USD 103 M in July. International reserves fell USD 1,553 M during the week, closing with a gross stock of USD 48,245 M.

5. The FX market tightens

Over the last week, even though agricultural exporters kept selling at a good pace (we estimate around USD 150 M per day), the BCRA bought only USD 29 M, bringing net purchases so far this month to USD 232 M. If this pace holds, the month would close with net purchases of just USD 270 M. While not an alarming figure, it is a yellow light considering that agricultural supply would exceed USD 3,000 M, which points to a persistent rise in demand that could put more pressure on the market in the coming months as agricultural supply tapers off, unless international prices keep rising. The BCRA's interventions were enough to keep the exchange rate from rising excessively: it rose 0.8% during the week and is up 1.0% in the month. For now, the FX anchor holds in a context in which interest rates remained stable, with the TAMAR rate closing at 23.8% NAR, slightly above the previous Friday and almost 1 pp below the end of August.

6. Dollar-linked bonds lead on the back of the dollar

With stable rates, the peso curve closed mixed. Dollar-linked bonds led with a 0.5% gain, driven by the short end (0.7%) and the rebound in the exchange rate, followed by fixed-rate/TAMAR duals (0.4%) and fixed-rate instruments (0.1%), while TAMAR bonds were unchanged. Further back, CER bonds fell 0.5%, with the long end down 0.8%, and DL/TAMAR and CER/TAMAR duals dropped 0.6% and 1.1%. At these prices, Lecaps and Boncaps yield between 1.8% and 2.3% EMR. The CER curve trades between CER+3% and CER+4.7% in the 2026 segment, between CER+4% and CER+8.6% in 2027 and between CER+9.5% and CER+10.5% from 2028 onwards. Dollar-linked bonds yield on average 5.9% over devaluation, TAMAR bonds a 5.0% spread over the reference rate and CER/TAMAR duals 9.7%. Implied inflation between CER bonds and Lecaps stood at 1.9% m/m for September and October and 1.7% m/m from November, while the exchange rate implied by dollar-linked bonds stands at ARS 1,548 for end-October and ARS 1,577 for end-November.

7. The Treasury eases the September maturity

The Treasury converted 75% of the D30S6 Lelink, leaving the end-of-month maturity at USD 1,099 M, down from USD 4,397 M previously, relieving pressure on the end-of-month fixing. It paid some premium over the secondary market, 425 bps on the D30O6 and 296 bps on the D30N6, and most of the swap was concentrated in the D30O6, which took USD 2,419 M of the USD 3,332 M awarded. The 2028 TZV28 attracted just USD 70 M, a sign that the market is taking short-term hedging rather than extending duration. The problem thus moves to October, which jumps to USD 4,575 M and becomes the largest dollar-linked maturity of the year, above the September one that has just been defused. Today the Treasury holds the last auction of the month which, taking the swap into account, faces maturities of about ARS 8.6 trillion, compared with ARS 13.6 trillion before the conversion.

8. Hard dollar debt plunges

Dollar-denominated debt fell sharply during the week, with Bonares (-3.9% on average) hit slightly harder than Globales (-3.4%). The blow was concentrated at the long end, with AL41 (-6.0%), AN29 (-5.9%), AL35 and AE38 (-5.6%) leading the declines, while the short end cushioned the fall, with the AO27 losing just 0.3% and the GD29 1.2%. The external backdrop weighed again, with long-term U.S. yields at their highs, but local factors also played a role: the weak activity data and the first signs of electoral noise. Country risk closed at 609 bps, 85 bps above the previous Friday. At these prices, Bonares yield between 4.3% and 12.9% and Globales between 7.1% and 10.8%. BOPREAL bonds held up better, falling 0.8%.

9. The Merval extends its decline

The Merval fell 5.6% in dollar terms and closed at USD 1,784, leaving it down 5.9% in September and 11.7% year-to-date. Losses were widespread: financials lost 7.5%, real estate 5.2%, consumer discretionary 5.1% and energy 5.0%, while consumer staples (-2.3%) and construction (-2.4%) posted the smallest declines. Within the leading panel, the biggest drops were Supervielle (-9.6%), Macro (-9.2%), Edenor (-9.0%), BBVA (-7.7%) and Galicia (-7.3%). No stock ended in positive territory, with Cresud (-0.4%) and Transportadora Gas del Norte (-0.5%) posting the smallest losses.

What's ahead

The macro agenda brings two releases. On Monday, UTDT publishes its September Government Confidence Index (ICG), which will help gauge whether weaker activity and rising poverty are starting to weigh on support for the Government, in a month in which private wages kept recovering. On Tuesday, INDEC releases the second-quarter balance of payments, which will show where the dollar demand is leaking that, despite the strong trade surplus and the good pace of agricultural sales, keeps the BCRA from buying more. The financial focus will be on the peso market and dollar debt: on Monday the Treasury faces the last auction of the month, and the market will keep a close eye on country risk, with Brazil's elections on Sunday as the regional backdrop.