Reports

The March Economic Report highlights signs of accelerating global activity, consolidation of candidates in the US elections, positive performance of American stocks driven by earnings growth expectations, and economic challenges and opportunities in Brazil.

In the global scenario, we observe signs of economic activity acceleration, although interest rates remain high. This movement is occurring not only in the US but also in other parts of the world, including Asian countries such as South Korea, whose exports are considered a leading indicator for the global economic cycle.

Consumer inflation surprised the market with an acceleration starting from January, followed by some improvement in February. These data reinforce the recent dynamics of the interest rate market, which has been postponing implicit expectations of rate cuts in the US. Regarding the US presidential elections, the “Super Tuesday” confirmed the candidacies of Joe Biden and Donald Trump with a significant advantage.

Despite interest rate volatility, US stock indices maintain positive performance, driven by earnings growth expectations, especially in technology companies. The mobile correlation between stocks and US government bonds remains at a positive level.

In Brazil, the GDP of the fourth quarter of 2023 confirmed the stagnation of economic growth, although expectations for 2024 are on an upward trajectory. Strong labor market and wage pressures represent risks for inflation, but commodity prices have provided some relief. We observe a gradual movement of increasing local interest rates, reflecting global interest rates and service inflation.

The April Economic Report highlights interest rate movements in developed countries, impressive labor market data in Brazil, and the challenging scenario faced by the Real.

In April, Japan saw its first interest rate hike in almost two decades, contrasting with most of the rest of the world, which had raised interest rates significantly until last year and is now delivering (or planning to deliver) rate cuts. Meanwhile, the Swiss National Bank was the first among peers in major developed economies to initiate a cycle of interest rate cuts, possibly favoring similar movements in other regions.

In its March meeting, the Federal Reserve kept the US benchmark rate steady but made significant adjustments to its economic projections, signaling higher rates for longer. Moreover, the meeting minutes revealed that the vast majority of committee members wish to begin a slowdown in the pace of asset sales from the central bank’s balance sheet soon.

The interest rate market, which had converged to the expectations of the FOMC (Federal Open Market Committee), reopened following robust data on economic activity, labor market, and inflation. Despite volatility, the US stock market maintained a positive performance in the first quarter, with contributions less concentrated in large technology companies due to improvements in other sectors such as energy.

In Brazil, recent labor market data continues to be impressive, with another month of strong net formal job creation in February, as indicated by Caged, and a historically low unemployment rate according to PNAD Contínua. Nevertheless, underlying services showed results below expectations in March’s IPCA, although they remain at elevated levels. Additionally, the National Treasury’s bi-monthly revenue and expenditure report revealed a comfortable result at the beginning of the year, postponing the need for budgetary contingencies.

On the other hand, the Brazilian stock market, represented by the Ibovespa, has faced challenges since the beginning of the year, with much of the negative performance coming from state-owned companies such as Petrobras and Vale. The fund industry stands out, delivering better results than the index in 2024. Meanwhile, the Real has been deteriorating, surpassing the 5 US$/R$ mark at the end of March and approaching 5.30 US$/R$ in mid-April, even after the additional foreign exchange swap auction announced by the Central Bank.

The Turim Monthly Economic Report highlights the global dynamics at the beginning of 2024, revealing a strong job market in the United States, escalating geopolitical tensions, and volatility in global interest rates.

The Non-Farm Payroll surprised the market with a net creation of 353 thousand jobs in January, well beyond estimates. Additionally, there was an acceleration in hourly wages, driven by weather-related factors that impacted actual hours worked.

On the global front, geopolitical tensions, especially in the Red Sea region, affected supply chains, resulting in increased freight costs. Regarding the U.S. presidential election, former President Donald Trump confirms strength in the Republican primaries, making the most likely outcome a contest between Trump and the current President Joe Biden, representing the Democratic Party.

In Brazil, the January IPCA (National Broad Consumer Price Index) exceeded expectations, revealing continued high pressure on underlying service prices. On the other hand, there is also an improvement in the external accounts, driven by the strength of net exports in the trade balance.

In the markets, the beginning of the year was marked by volatility in interest rates due to uncertainty about global monetary policy, especially in the U.S. The market, which had been assigning a high probability of cuts already in the March meeting, faced a sequence of “discouraging” events for the thesis, postponing expectations for the start of the cutting cycle.

Some of the major U.S. stock indices, such as the S&P 500 and the Nasdaq Composite, ended January in positive territory despite interest rate volatility. However, the returns of these indices are largely attributed to a few names. That said, the Ibovespa started the year with a weaker performance.

The Economic Report for this month highlights the strong process of global disinflation, the conservative stance of the COPOM, and the closure of global interest rates in the last months of 2023.

In 2023, we witnessed a faster global disinflation than the market expected, driven by the reorganization of production chains and the moderation of commodity prices. In this context, the central banks of major economies were able to choose to combat inflation in an “opportunistic” manner, enabling an interruption of the interest rate hike cycle in 2023. In the case of the United States, there is speculation that the interest rate cut cycle may begin as early as the first quarter of 2024.

Despite the improvement in the economic situation, the Monetary Policy Committee of the Central Bank of Brazil (COPOM) adopted a conservative stance, maintaining the indication that it foresees the maintenance of the current pace of interest rate cuts in the upcoming meetings. At the same time, the country’s net exports reached a record balance of almost 100 billion dollars, reflecting growth in the volume of exports, despite the decline in prices of commodities important for the export agenda.

December was also marked by the closure of interest rates in the U.S., impacting not only short-term maturity bonds but also longer-term ones. This movement helped explain the strong performance of stock indices in the month. On the other hand, the majority of the return of the main indices for the year was concentrated in a few names. For example, the S&P 500 had about 75% of its return explained by the “Magnificent 7” – a name attributed to a hypothetical basket of seven of the largest technology companies in the index.

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.