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November brought impactful movements in global markets. The Economic Report for November highlights the closure of the long-term vertices of the U.S. yield curve, influenced by the announcement from the U.S. Treasury to slow down the issuance of long-term bonds. Another relevant factor that contributed to the movement in interest rates was the benign composition of inflation, especially in more inertial components.
The improvement in the economic situation was reflected in the communication of some members of the FOMC (Federal Open Market Committee) advocating the possibility of initiating a cycle of interest rate cuts in the first quarter of next year if inflation data continue to improve, aiming to maintain a stable real interest rate.
Surprisingly, Brazil’s third-quarter GDP showed resilience, but stronger numbers in services and household demand may cause some discomfort for the COPOM (Brazilian Central Bank’s Monetary Policy Committee), which continues to await more solid signs of a slowdown in economic activity. Additionally, the government chose to maintain the primary result target for 2024 but is still trying to avoid budgetary constraints next year.
November stood out as the best month in over 15 years for global fixed income, driven by the potential end of the interest rate hike cycle. Global stock markets also recorded strong gains, providing favorable results for diversified portfolios.
The pricing of terminal interest rates in Brazil declined again, reflecting the global trend, while the local stock market rose by 12.5% in the month, approaching the historical high reached in 2021.
In its latest meeting, the Federal Open Market Committee (FOMC) of the Federal Reserve (FED) kept interest rates stable but adjusted its communication, explicitly acknowledging the tightening of financial conditions. This tightening, driven by the rise in long-term rates, could, if sustained long enough, potentially replace the need for additional increases in the fed funds rate.
Recent indicators point to a gradual slowdown in the U.S. economy, including the labor market, which had been proving stronger than expected until recently. It’s worth noting that while the market has initially welcomed the weaker data, perceptions may change as the disinflation process becomes clearer, raising the risk of a recession.
In Brazil, the October IPCA-15 showed progress in the disinflation process, especially in core metrics and the services segment, closely monitored by the Monetary Policy Committee of the Central Bank (COPOM). Despite this, the committee expressed concern about the international scenario, particularly the risk of possible currency depreciation, which could create new inflationary pressures.
Markets highlight of the month was the significant rise in U.S. interest rates, reaching near 5% in nominal long-term rates. However, a substantial part of this movement reversed in the first days of November. This shift played a significant role in the performance of major stock indices, which recovered a considerable portion of the October decline early in November, both globally and in Brazil.
The behavior of oil is also noteworthy, despite escalating global geopolitical conflicts. Currently, just over a month after the Hamas attack in Israel, oil is being traded below prices prior to the event.
Our September Economic Report highlights the positive revision of growth expectations for the United States, driven by favorable activity and employment data, while activity in the Eurozone and China continues at a weak pace.
At its last meeting, the FOMC (United States monetary policy committee) kept interest rates stable, but significantly revised economic projections, indicating the need to maintain interest rates at higher levels for longer. The Bank of England also surprised by keeping rates unchanged, due to the slowdown in inflation.
In the Brazilian economy, the Central Bank reduced the Selic rate by 50 basis points, following the plan of gradual cuts. Furthermore, economic activity has been resilient, even with high interest rates, and the country has maintained a relatively comfortable external situation, with a strong flow of investments into the country and performance and surplus in the trade balance.
In the markets, we see the continued rise in long-term interest rates in the US, reaching levels not seen since 2008. Global stock indices face challenges, influenced by the opening of interest rates, with even the giants of the technology sector, called “Big Techs”, recording negative performance in the month. In Brazil, rates on long-term fixed income securities also rose, although with less intensity compared to other emerging economies. In a similar way to what happened in the interest rate market, Ibovespa also did not perform well in September, but it still performed better than its peers.
Our August Economic Report highlights that the global economic landscape continues to be influenced by movements in the interest rates market, even in the face of the likely end of the tightening cycle in major economies.
On the global front, we observed Federal Reserve Chairman Jerome Powell’s firm stance at the Jackson Hole Symposium, emphasizing that the decision to further tighten or keep interest rates stable in the upcoming meetings will depend on the evolution of a comprehensive set of economic data and the balance of risks. This speech occurred at a time when the market is no longer pricing in additional interest rate hikes. Similarly, the Eurozone and the United Kingdom appear to be approaching their respective “peak interest rates.” Meanwhile, the risk of a more pronounced economic slowdown is gaining strength, considering recent moderation in the labor market, the depletion of pandemic-related savings, and the rise in consumer defaults.
In Brazil, the second-quarter GDP positively surprised, driven by a resilient job market and fiscal stimulus, despite a correction in the agricultural sector. However, expectations still point to a contraction in the second half of the year. Additionally, the government has submitted the 2024 budget proposal to Congress, aiming for a near-zero primary result next year. To approve this proposal, a series of additional measures to increase revenue will also need to pass in Congress.
Regarding markets, the notable development is the rise in long-term U.S. interest rates and resulting pressure on the American stock market. In the local scenario, the Brazilian Real faced challenges amid the global risk aversion environment and political and fiscal turbulence.
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.