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Our July Economic Report highlights how the global economic landscape continues to be characterized by the process of disinflation in the United States and various parts of the world, influenced by the decline in commodity prices.
Core inflation indicators show signs of cooling down, although they remain above the established target. In China, the economy is facing a slowdown, reflected in deflationary consumer and producer inflation indices, along with consistently below-expectation economic data, prompting authorities to increase stimulus measures.
In Brazil, the Monetary Policy Committee (COPOM) initiated a cycle of interest rate cuts with a 50 basis point reduction, surpassing the initial expectations of a more moderate cut. The decision divided the committee, indicating different perspectives regarding inflation. The recent upgrade of Brazil’s credit rating by Fitch Ratings reflects a macroeconomic and fiscal performance better than expected, although challenges still exist to fully achieve the goals of the new fiscal framework. Despite this improvement, the country still falls below “investment grade,” which affects the inflow of foreign investments into the public bonds market.
In global markets, long-term US government bond rates reacted to the growing risk perception, reflecting the increased issuance of bonds to address the fiscal deficit and the possibility of raising long-term interest rates in Japan. Meanwhile, in Brazil, the interest rate curve suggests a basic interest rate (Selic) around 9% at the end of the Central Bank’s rate-cutting cycle. However, recent volatility in the cycles highlights the uncertainty surrounding market projections.
The slowdown in activity in China and the Eurozone, the prospect of further interest rate hikes in the United States, and the impending start of an interest rate cutting cycle in Brazil were highlights of our June Economic Report.
Global economic activity is decelerating, especially in the Eurozone and China, reinforcing the downward trend in commodity prices. However, the risk of crop losses due to El Niño may elevate agricultural prices in the near future.
In the United States, economic data has been stronger than expected, leading the Federal Reserve to adopt a more hawkish stance in combating inflation. Although the rate was held steady at the last meeting, the committee implicitly signaled (through its economic projections) that it foresees two additional rate hikes by the end of the year.
The monetary policy committee of the Central Bank of Brazil has revised its estimate of the natural rate of interest upward – the real rate that neither stimulates nor contracts aggregate demand and inflation. Despite this, in the face of a disinflation process and improved expectations, the committee stated that it may initiate a cautious easing process as early as the next meeting.
The global disinflation process is still ongoing, in the wake of the drop in the prices of several commodities. This is what our Economic Report for this month shows. Despite a downward trajectory in global inflation, the components linked to services continue to be quite resilient, making the convergence of inflation towards the targets quite gradual.
In the United States, the deterioration of the credit supply that followed the events in the American banking system created an environment of high uncertainty. However, it is possible to note that there was no relevant contagion of credit to the other components of financial conditions. In practice, the withdrawal from an imminent hard landing scenario helped to improve credit spreads and stock performance.
Furthermore, despite the still unfavorable economic scenario, the strong performance of some companies continues to support the performance of the US stock exchange. This trend was reinforced by tech companies with the potential to benefit from the development of new technologies in artificial intelligence.
In Brazil, the GDP for the first quarter proved to be much stronger than market expectations. On the supply side, the result reflected a very expressive performance of the agriculture sector, which had its highest quarterly increase since 1996. On the other hand, on the demand side, investment in fixed capital showed a sharp drop, indicating a worse perspective for growth of the country in the future.
The month was marked by a more dovish tone from the Federal Reserve, the US central bank. This is evident in Turim’s April Economic Report. Coupled with a favorable trajectory of economic data, this change led to a tightening of the yield curve, which already includes interest rate cuts in 2023.
The European central bank also slowed down its tightening cycle, as expected, but a pause does not seem imminent. The monetary authority’s rhetoric remained firm, indicating that there is still work to be done.
Meanwhile, the growth of the Chinese economy has been less intense than projected. At the same time, a dichotomy between services and industry can be observed, with the former still expanding while the latter has already entered negative territory.
In this context, the S&P 500 has shown positive performance since March. However, it is noteworthy that the contributions to this movement have been highly concentrated in companies with higher market value, predominantly in the technology sector, while the rest of the index has had more moderate performance.
Given the evolution of the global scenario, particularly in light of the likely end of the tightening cycle in the US, the correlation between fixed income and equities in the short term seems to be back in negative territory. It is still too early to say if this trend will reemerge, but if confirmed, it should eliminate one of the recent challenges in portfolio management.
The events of March were very relevant for the global economy. In a short period of time, two American banks (Silicon Valley Bank and Signature Bank) were declared bankrupt, causing apprehension on the markets. Even so, the main international central banks followed the path of raising interest rates – communicating the separation between policies aimed at price stability and measures to ensure the stability of the financial system.
The collapse of the two financial institutions generated a wave of withdrawals from regional banks in the US, but the prompt response by monetary and regulatory authorities significantly reduced the chances of a systemic crisis in the banking sector. However, there should be a reduction in credit concessions in the near horizon.
On the domestic scene, the main economic theme was the presentation of the proposal for a new fiscal framework – replacing the Expenditure Ceiling. Although there are still doubts about how some problems will be addressed, the disclosure was positively received by the market, since it eliminates the risk of a lack of control of the public debt.
Still in the internal environment, the deceleration of the credit market has also been gaining more attention. In the first quarterly inflation report of the year, the Monetary Policy Committee (Copom) negatively revised its estimate of the change in the stock of credit, showing very moderate real growth in 2023.
The opening of the post-Covid Chinese economy gained momentum in February – this is what our February Economic Report shows. The recent increase in data that encompass different metrics of mobility and economic activity is the highest since the beginning of the series, in 2020, suggesting expansion in economic activity.
In the United States, the labor market remains heated, despite the monetary contraction implemented by the Federal Reserve (US central bank). In addition, the US stock market also performed relatively well – but this balance could prove unstable if interest rates rise again.
In Brazil, the Brazilian economy had a slight decline in the 4th quarter of 2022. However, in the year, the result of 2.9% was considerably better than initially predicted by the market.
For 2023, the very contractionary interest rate and the problems in the credit market should exert a downward force on domestic activity, partially offset by stronger agroindustrial activity and fiscal impulse.
The beginning of 2023 has been marked by a recovery of the US stock market, especially in more discounted assets. Our monthly economic report shows that this movement was favored by the closing of the yield curve and prospects of a retreat in inflation.
However, in early February, after surprisingly stronger data, especially in the labor market, we saw some of this movement reversing.
In the same direction, the dollar, which had been showing a weaker performance since the end of last year, showed some recovery at the margin.
In Brazil, the national currency was able to remain relatively well behaved in the face of a rather negative flow of news in recent months.
Favorable external factors such as the reopening of China and, again, the closing of US interest rates help to explain the behavior in the period. However, it is noted that the currency has performed worse than most of its peers in 3 to 4 month horizons.
The global rise in interest rates, with the main monetary authorities seeking to combat the rise in inflation, was one of the main topics that impacted the year 2022 and one of the highlights of this month’s report.
This year, with weaker economic data in the United States, especially with regard to inflation, some relief is expected in the interest rate hike cycle.
In Europe, winter surprised positively, since the cold is less rigorous. In view of this, there was a significant decline in gas prices on the continent, with implications for December inflation, which showed a drop in the headline index despite pressure on the core.
Another highlight is the reopening process in China, which is increasingly consolidated and has the potential to significantly affect the commodity market.
“Since the end of last year, Chinese authorities have been lifting restrictions related to Covid-19 and announcing a series of economic stimuli. It is speculated that the advancement of this process will result in additional support for oil prices, which has the country as one of its largest importers”, says the report.
Despite the increase Covid-19 cases in China, the authorities have chosen to relax measures to combat the virus, signaling a true paradigm shift: now, instead of zeroing out cases, the country’s goal seems to be “to flatten the curve “, as happened in the West. This is what our Economic Report of the month reveals.
At the same time, US inflation has been mild, allowing the FOMC to have some peace of mind to reduce the pace of interest rate hikes at its next meeting. However, some metrics, such as core services excluding rent, still have a hazy path ahead.
In the local scenario, the report shows how the slowdown in activity and the uncertainty regarding the fiscal scenario have affected the confidence of the Brazilian business community.
In this context, the release of GDP for the third quarter points to a more intense deceleration than expected, reinforcing the perception that the economy began to cool off in the second half of the year.
The deceleration of the cycle of interest rate hikes by some of the main Central Banks was one of the highlights of the month of October. In this context, the market predicts a deceleration of inflation in the United States. The great uncertainty, however, refers to the interest rate necessary to contain the advance of underlying inflation.
The document also shows that the recent drop in prices in the real estate market may have relevant implications for US inflation, especially in items linked to rental prices, which have been under pressure in the current cycle.
The results of the monetary tightening have also started to show signs in Brazil. In its last minutes, the Monetary Policy Committee (Copom) emphasized that the effects could already be identified in economic activity and in credit statistics, highlighting the composition of credit granted to families and a moderate increase in defaults.
September was marked by the announcement of a surprising tax package in the UK. In a complex context, which already included high interest rates and growth in public spending, the addition of tax waiver policies without counterparts generated significant repercussions in the market.
The market reaction to the bids was one of the biggest joint interest-rate and sterling-depreciation moves in its history.
In this global context – of intense devaluation of the currencies of developed and emerging economies, in face of the strong appreciation of the dollar – the performance of the Real has been sustained relatively well, having even had a positive performance in the year.
In addition to foreign exchange, another niche that has been strongly impacted by the generalized opening of interest rates around the world is the stock market. With the addition of negative revisions to corporate earnings estimates in the context of a global slowdown, international stock exchanges have presented a weaker performance, with prices negatively impacted by lower-than-expected quarterly balance sheet projections.
The US interest rate market continues to re-price its terminal rate – the interest rate that will end the high cycle promoted by the Federal Reserve –, as well as the path of cuts that will follow it. This is one of the main topics that has been impacting the global scenario and one of the highlights of this month’s Economic Report.
The continuity of this economic environment concerned with inflation leads to a positive correlation between the returns of fixed and variable income assets – which represents one of the biggest recent challenges to the construction of portfolios.
“There were few times over the last 20 years when asset performance moved in the same direction. In this cycle, however, this correlation reached a very high level compared to the historical pattern”, says the report.
In Brazil, although the accumulated flow in shares has been stable in the last five years, Turin believes that there is room for the country to attract resources in the coming years, if the fiscal solution is considered.
The global economy continues to navigate towards a moment of tightening monetary conditions – and at an increasingly accelerated pace. This topic is analyzed in our Economic Report.
In the United States, headline inflation seems to have reached its peak, with evidence of improvement in components associated with relief in production chains and correction in commodity prices.
This adjustment in commodities took place specially in energy-related items, reflecting the global escalation of interest rates and the possibility of recessions in major economies, such as the North American and European.
In the stock market, the American stock market showed a strong recovery from mid-July, reflecting the closing of the American yield curve. The dollar also remains strong when compared to its peers.
In Brazil, the Central Bank indicated that the end of the monetary tightening cycle was approaching, leading real interest rates to a relevant fall.
During the first half of the year, inflation reached the highest levels of recent decades in several countries. This was the main theme of this month’s EconomicReport.
On the global stage, central banks in developed countries responded with tougher measures, tightening monetary conditions since the beginning of the year.
In June, the interest rate hike was even faster, with the Federal Reserve, the US central bank, opting for a higher hike than initially suggested.
In Brazil, the Central Bank kept the door open for a last interest rate hike and announces a strategy to maintain the Selic rate in contractionary territory for an extended period.
That high-rate outlook has pushed US long-term bonds to their worst returns for the first six months of the year in decades. The simultaneous decline in the fixed and variable income markets, an inversion of the relationship that prevailed in recent years, represented a major challenge for portfolio management.
Global economic activity continues to show growth, despite the tightening of financial conditions promoted by central banks. This is what our May Economic Report shows.
The text also highlights how the rise in interest rates is impacting markets in the United States, such as real estate, which is already showing relevant effects with a drop in sales of new homes.
In Brazil, the persistence of inflation, especially in energy, has increased pressure for more public spending, which, despite high collections in the short term, represents a risk to the trajectory of public debt.
Finally, on the local stock market, there is a clear discrepancy between the stocks that benefit from the rise in commodity prices, which have been sustaining the rise in the index accumulated in the year, and the others.