Reports

The December Economic Report highlights the resilience of the global economy, the pressure on the dollar following the U.S. elections, and the fiscal challenges faced by Brazil.

In the global scenario, U.S. employment data presents mixed signals but remains consistent with a resilient economy. Particularly noteworthy is the stability in unemployment insurance claims, which suggests that the risks of an abrupt slowdown (hard landing) remain low. In the Eurozone, the situation is different, with accumulating evidence of economic slowdown increasing the likelihood of a faster monetary easing cycle by the European Central Bank.

Brazil’s GDP showed robust growth in the third quarter, with a particular emphasis on domestic absorption (excluding the effects of the contraction in net exports and inventory variations). However, the observed expansion far exceeds potential GDP estimates, raising risks of inflationary pressures and a future slowdown. Additionally, rising uncertainty in the local market, driven primarily by the unsustainability of public accounts, has intensified pressure on the Central Bank. In this context, the monetary tightening may push the Selic rate above 15% in 2025.

In the markets, resilient economic activity and favorable prospects for the private sector, intensified by the election results, have contributed to the positive performance of the U.S. stock market, despite a new round of rising interest rates throughout November.

The dollar continued its upward trajectory, driven by expectations of economic policies from the Republican government starting next year. In Brazil, the announcement of a spending cut package, combined with an expansion of income tax exemptions, generated uncertainties about public accounts. This scenario contributed to the sharp depreciation of the real, which reached historic levels above R$6.00/USD.

The October Economic Report highlights the beginning of a new interest rate cut cycle in the U.S., the Chinese government’s response to slowing domestic demand, and revisions to the inflation forecasts by Brazil’s Central Bank.

Globally, the Federal Reserve initiated a rate cut cycle, with a 50 basis point reduction at the latest FOMC meeting, bringing the federal funds rate to a range between 4.75% and 5.00%. Central bank president Jerome Powell indicated there is no rush for further cuts, suggesting the pace of future cuts would be 25 basis points per meeting, depending on economic data.

In contrast, China announced its largest stimulus package since the pandemic in response to declining domestic demand. Measures include interest rate cuts, reductions in reserve requirements, and targeted actions for the real estate and stock markets. Chinese President Xi Jinping also addressed an extraordinary Politburo meeting, indicating further stimulus, including fiscal measures, is on the horizon. The market responded positively, with stocks and commodities, such as iron ore, gaining value.

In Brazil, the Central Bank raised the Selic rate by 25 basis points to 10.75% per year in response to persistent inflation and strong economic growth. Despite a slight deceleration observed in the IPCA-15, influenced by volatile items like airfare and vehicle insurance, inflationary pressures in the country remain challenging.
In the markets, we observe an increase in the interest rate differential between Brazil and the U.S., with the U.S. entering a monetary easing cycle while Brazil is tightening. In the U.S. stock market, a potential mean reversion among indices may occur if the soft-landing scenario materializes, while the local Brazilian stock market faces challenges, historically underperforming during interest rate hike cycles. Nevertheless, we believe it is important to maintain allocations in equities, which still offer attractive multiples in a resilient economy, with potential positive drivers from emerging market flows.

The September Economic Report highlights the global scenario of economic slowdown and monetary adjustments in developed economies, especially in the U.S.

The improvement in inflation data and the slowdown in the labor market observed over the past few months allowed Federal Reserve Chairman Jerome Powell to signal the start of an interest rate-cutting cycle in September, during his speech at the Jackson Hole Symposium. The decision comes about six months after the first central bank of a developed economy (Switzerland) made its first rate cut of the year. Additionally, the U.S. elections and their possible implications on global trade remain under scrutiny.

In Brazil, the GDP for the second quarter grew by 1.4%, surpassing expectations. However, inflation remains persistent, leading the Central Bank to revise its monetary policy. The strong economy and the interruption of the disinflation process in the Brazilian economy prompted the Central Bank to begin a new interest rate hike cycle starting in September. As a result, Brazil stands out as one of the few economies in the world with the prospect of increasing interest rates over the next 12 months.

In the markets, the U.S. stock market continued to show strong results, reflecting the expectation of rate cuts amid a controlled economic slowdown. In Brazil, the Ibovespa posted a solid rise, driven by improved company results (aligned with the evidence of a strong economy), while the credit market continues to attract significant inflows in a high-interest-rate environment. On the other hand, the Dollar remains strong against the Real, in a challenging environment for currencies used in interest carry strategies.

The August Economic Report highlights changes in global economic expectations, financial market reactions, and Brazil’s challenges.

Global inflation continues to moderate, particularly in the U.S., where the June PCE deflator confirmed a significant slowdown in the second quarter of 2024. The Bank of England (BoE) cut its interest rate for the first time since 2020, while the Federal Reserve (FED) held rates steady but signaled the possibility of future cuts. The U.S. labor market showed signs of slowing, raising concerns about a potential recession.

Global markets reflected the increasing risk of recession, especially in the U.S., with a rapid decline in interest rates and increased volatility in stock markets, as evidenced by the VIX index. The Bank of Japan (BoJ) continued to normalize its monetary policy by raising the base rate, negatively impacting the markets.

Brazil faces fiscal challenges, with the local market skeptical about the government’s ability to meet its primary result targets. Despite revenue growth, expenses continue to rise above expectations. The Monetary Policy Committee of the Central Bank (COPOM) kept interest rates steady but indicated that further hikes might be necessary due to worsening economic conditions.

The Brazilian foreign exchange market remains under pressure, with the real continuing its depreciation trajectory, resulting in underperformance compared to other similar currencies.

The July Economic Report highlights changes in inflation and interest rate expectations in the United States, the interruption of the interest rate cut cycle in Brazil, and the performance of global and local financial markets.

The first debate among the United States presidential candidates increased uncertainty regarding Joe Biden’s health, raising the chances of Trump being elected in November and bringing speculation about a possible replacement of Biden as the Democratic candidate. Inflation in the United States showed a strong deceleration in May, with favorable data even in the more inertial components. Despite this, the Federal Reserve’s Federal Open Market Committee (FOMC) revised upwards its inflation and interest rate projections, including the estimate of the long-term interest rate, considered a proxy for the neutral rate.

The U.S. interest rate markets closed more intensely after the release of benign readings in the consumer inflation data for May. At the same time, the American stock market recorded another month of gains concentrated in a few companies.

In Brazil, the Central Bank’s Monetary Policy Committee (COPOM) decided to interrupt its cycle of interest rate cuts, signaling high rates for a longer period. This decision came amid the unanchoring of inflation expectations and intense currency depreciation. The Brazilian government promised to conduct a “fine-tooth comb” on expenses, but the sustainability of the fiscal framework remains at risk.

The Real depreciated significantly, diverging from other comparable currencies, although part of the movement was reversed after improved communication from the government. Meanwhile, the domestic stock market continued to underperform compared to global markets, reflecting the deterioration of sentiment regarding the local economic situation.

The June Economic Report highlights the beginning of interest rate cuts in some of the major developed economies, the gradual moderation of the U.S. labor market, the growth of the Chinese economy, the robust Brazilian GDP in the first quarter, and their impacts on the markets.

On the global stage, after a prolonged period of disinflation, some of the major developed economies are finally starting their respective cycles of interest rate cuts. The central banks of Switzerland, Sweden, Canada, and the Eurozone were the first to reduce their rates, with expectations that the UK and the United States will follow this trend by the end of the year. The labor market is also showing signs of normalization, with the unemployment rate and the number of job openings per unemployed person approaching pre-pandemic levels. Meanwhile, the Chinese economy is growing due to economic stimuli, despite facing challenges in domestic demand and the real estate sector.

Following the Federal Reserve’s Monetary Policy Committee (FOMC) minutes clarifying members’ willingness to raise interest rates, the U.S. yield curve began to steepen, although favorable economic data helped mitigate this movement. Interest rates closed May near their previous month’s levels, maintaining the likelihood that the first rate cut will occur in September. The American stock market, represented by the S&P 500, continued to perform positively, rising 4.6% in May and 26% over the last twelve months.

In Brazil, GDP for the first quarter rose 0.8% compared to the previous quarter, surpassing market consensus, reflecting the resilience of household consumption and the recovery in fixed capital investment. This performance reinforces growth expectations for 2024, currently projected slightly above 2%. Similarly, the labor market continues to surprise, with the unemployment rate trending downward and wage mass showing significant increases in April, potentially posing challenges for disinflation in the service segment and consequently for the Monetary Policy Committee of the Central Bank’s interest rate cut cycle.

The last COPOM decision was poorly received by the market, increasing uncertainty about the committee’s future stance and reflecting in higher premiums in the yield curve and implied inflation. The Real, in turn, recorded weaker performance against its comparable currencies, with local investors reducing their positions amid worsening domestic conditions.

The May Economic Report highlights robust inflation data and a moderation in the U.S. labor market, the postponement of interest rate cut expectations by the FOMC, the revision of fiscal targets in Brazil, and the impact of foreign flows on the Ibovespa.

In the global scenario, U.S. inflation data remained consistently strong in the first quarter of 2024, particularly the quarterly PCE, which surprised and led to a significant revision of January’s figures. The U.S. labor market is showing signs of a slowdown, with net job creation below expectations, moderation in wages, and a slight increase in the unemployment rate. The FOMC announced a deceleration in quantitative tightening in its latest communiqué, reducing the FED’s monthly balance sheet reduction pace starting in June.

In Brazil, sectoral surveys and labor market data remained strong in March, confirming a robust first quarter despite negative surprises in industry and retail. The government revised the primary surplus target for 2025 and 2026, reflecting the fragility of fiscal commitment, although Moody’s upgraded Brazil’s rating outlook to positive.

In the markets, as inflation proved stronger than expected in 2024, the anticipated start date for interest rate cuts in the United States was postponed. Currently, the market is divided between the possibilities of one or two 25 basis points (bps) cuts by the end of the year. Additionally, the U.S. corporate earnings season was positive, with profits exceeding expectations, boosting the performance of the S&P 500.

In Brazil, the Monetary Policy Committee of the Central Bank of Brazil (COPOM) opted for a smaller-than-prescribed cut in the Selic rate, with a split vote between members appointed by the previous government (who voted for a 25 bps cut) and new appointees (who advocated for maintaining the guidance of a 50 bps cut). The division caused discomfort in the market, which began to fear even more that the committee would become more lenient on inflation from next year when the new appointees become the majority. Finally, foreign investment in the Brazilian stock market was negative in the first four months of 2024, impacting the index’s performance. On the other hand, we are observing small signs of reversal in the preliminary data for May.

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.