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The latest global data indicate that the number of new cases, hospitalizations and deaths caused by Covid-19 are slowing down, which rises expectations around the advancement of economic reopening.
In the United States, the monetary policy committee (FOMC) showed that a relevant part of the members expects interest rate hikes as early as next year. Additionally, Chairman Jerome Powell suggested that the tapering process could start in November and end in mid-2022, at a faster pace than market expectations.
In Brazil, growth expectations for 2022 have been consistently revised downwards, as internal and external factors, such as the water crisis, the uncertainty of the fiscal and political scenario, the scarcity of supplies and global inflation present themselves without a clear solution in the short term.
Covid-19’s third wave globally has had a contained impact on mobility in the US. However, the country’s job market has been impacted by the new wave of the disease, temporarily interrupting the North American economic reopening process.
In Europe, the main highlight is the general elections in Germany, whose voting intention surveys point to a very volatile and uncertain scenario among candidates.
In Brazil, the water crisis remains worrying, with an immediate impact on the price of electricity. Although the composition of the energy matrix has become less dependent on water sources in the last 20 years, hydroelectric plants continue to represent the largest share of the electricity supply. Thus, the beginning of the rainy season in November will be a watershed for the local scenario.
Internationally, second quarter GDP in the United States came in below expectations but showed robust growth, led by consumption. In addition, US inflation has been surprising – but a significant part of this surprise comes from shocks in very specific components.
In China, the reduction in the compulsory deposit rate represented a loosening of monetary policy. The decision seems to indicate that the PBOC (People’s Bank of China) is now seeking an adjustment in its policy margin, after quarters marked by a restrictive stance.
In Brazil, a number of factors such as rising commodity prices, water shortages and agricultural losses caused by weather factors have led to an escalation in inflation. In the fiscal scenario, a higher-than-expected amount for the payment of precatories and the expansion of social programs represent a new threat to the spending ceiling.
In the international scenario, some countries already have over 60% of their population vaccinated with at least one dose. However, with new variants emerging, the number of Covid-19 cases have accelerated. The good news is that hospitalizations and deaths are not following this acceleration, which reduces this wave’s social and economic impact.
In the United States, the Fed signaled that the interest rate would rise twice in 2023 – a relevant change from March’s meeting in which it had announced interest stability. Even so, the message remains that the normalization process should be slow and gradual.
FED’s change in statement had an impact on commodities which, although they showed a robust increase in 2021, suffered relevant corrections in recent weeks.
The combination of robust growth with well-behaved long-term interest rates in the US also resulted in a significant overperformance of growth stocks (companies with high long-term growth potential). During the year, these stocks had a much worse performance than value stocks (companies whose price is considered below their intrinsic value). Now, the difference between them has been significantly reduced.
In Brazil, June was once again a very positive month for the flow of foreign investors to the stock market. This movement is mainly due to positive growth reviews and reduced fiscal risk perception with lower expected debt/GDP numbers at the end of 2021.
On the international scene, Europe accelerated its vaccination process, which generated greater optimism with the resumption of the bloc’s economy in the coming months – in particular with the arrival of summer, when activity in the service sector is more intense.
In the US, April and May inflation readings surprised forecasts well and raises the question of how these shocks might impact US monetary policy.
In Brazil, the 1st quarter GDP also surprised and led to a round of strong upward revision in growth projections for 2021, which are already around 5.5%.
On the other hand, the low level of rainfall and strong demand raised the alarm of risk of problems with the supply of electricity in the country, which translates into higher tariffs.
Finally, although the country’s structural challenges in fiscal terms have not changed, upward revisions to growth and inflation projections resulted in a lower estimate for the gross debt/GDP ratio at the end of the year – which makes the dynamics of the coming years less unfavorable.
The North American immunization program is quite advanced. This success and 2021’s strong fiscal impulse, with the direct transfer of resources to the population, have resulted in a rapid reopening process of the economy.
Even with strong data, Fed’s stance has remained firm and the institution has already stated that it should maintain high monetary support.
In Brazil, before the new lockdowns announced, economic activity had been showing better-than-expected results. Highlight for the increase in the IBC-Br, monthly GDP proxy calculated by the BC, which in February was already 2.3% above that observed in the pre-pandemic period.
On the other hand, inflation, despite some bearish surprises at the margin, remains under pressure. In the short term, with the strong movement of #commodities, this pressure should continue. But the relevant idleness still present in the labor market, added to the reduction of fiscal and monetary stimuli this year, should mitigate a more consistent acceleration of prices.
In March, the United States and United Kingdom stood out with their vaccination pace, while the European Union followed well behind. This divergence should be reflected in the reopening speed and in the performance of these economies in the coming months.
In the US, the last monetary policy committee meeting kept the interest rate signal stable at 0% until the end of 2023 – despite strong economic results. The market, however, continues to doubt this signal and prices around three highs.
In Brazil, with the still worrying signs of COVID-19 in April and restrictive measures being extended in several states, the start of the second quarter should be challenging for economic activity.
In Politics, the noise surrounding the Brazilian fiscal trajectory, intensified by the impasse of the 2021 budget, has been reflected in the risk premiums on the yield curve. While the BC insists on a partial normalization of the Selic – which, according to the recent communication, would mean a rate of around 4.5% –, the pricing on the yield curve is 6.5% at the end of the year, reaching around 10 % In the next years.
In February, the pace of vaccination in the United States was impressive due to its speed. The North American performance was better than the European one, which reflect in how different these economies will grow over the next few months, with a faster reopening of the US. In Brazil, the new lockdown measures should impact the recovery of the economy.
Still on the foreign agenda, the approval of a US$ 1.9 trillion fiscal stimulus package also impacted markets. This government disbursement, added to the reopening of the economy and the very accommodative monetary policy, should produce a strong acceleration of North American growth over the next few quarters.
In Brazil, the Central Bank (BC) should announce a hike in the basic interest rate in March. One of the main reasons for this outlook is the worsening inflation outlook.
The year began with the beginning of the vaccination process in several countries – but with different speeds. Among the larger ones, the highlights are the UK and US, which should be reflected in a faster recovery of these economies in the short term. In the Eurozone, on the other hand, the process has been slower, as in Brazil.
In Brazil, the Central Bank signaled that it intends to start the Selic normalization process. In a hypothetical scenario in which the rate reaches a level between 4.0% and 5.0%, and in view of the pricing in the markets of stability in the interest rates of other emerging economies, the Brazilian currency would no longer be considered low yield – which, in our view, would tend to favor a scenario of exchange rate appreciation.
Brazilian gross debt ended 2020 at 89.3% – a big jump in the year, but well below what was estimated a few months ago. Even so, the level is high for an emerging economy and the fiscal situation remains the country’s greatest weakness.