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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.
Our April Economic Report shows the consequences of widespread inflation and highlights how the Federal Reserve’s (Fed, the US central bank) change in stance has already produced a relevant tightening in global financial conditions.
Due to the process of normalization of monetary policy in the world, stock markets have been facing severe corrections. What draws attention in this market correction is that fixed income, which in general acts as a balance in investment portfolios, also presents a negative result, due to this change in the posture of global central banks.
Another consequence of the tightening of monetary conditions is the appreciation of the dollar, due to the increase in the interest rate differential – which justifies the rapid devaluation of the real in April.
Our March Economic Report highlights the heating up of the US job market where the ratio between the number of unemployed and the number of vacancies dropped significantly in the post-pandemic period.
This scenario, combined with the persistence of inflation and a more hawkish stance (with a bias towards raising interest rates) adopted by the Federal Reserve, the American central bank, has led to a significant increase in expectations for the cycle of interest rate hikes. .
In Brazil, the Real benefited from the rising commodities environment. After the acceleration of commodity prices, the flow of international capital began to seek assets, especially currencies, in emerging economies.
The escalation of the conflict between Russia and Ukraine has led to a significant increase in commodity prices. In our February’s Economic Report, we explained that, in addition to the immediate inflationary impact, an eventual supply cut could limit Europe’s growth for example, which is heavily dependent on Russian natural gas.
In the US, the accelerating global inflation environment and a significant change in the Fed’s speech made the market price a more abrupt start to the hikes cyccle in interest rates.
This inflation scenario and high interest rates combined with the commodities boom, has led the American stock market to reverse its behavior, reflecting a more favorable performance for value assets than for growth assets.
The US, UK, Japan and European labor markets have converged to better levels and are generally close to pre-pandemic levels. In our January Economic Report, we explained that this movement has been one of the main vectors of the hawkish steer – a bias towards an increase in interest rates – from the Central Banks in these regions.
In Brazil, the proposals for tax exemptions to contain the rise in fuel prices is the main highlight. In the long term, they should imply an increase in country risk and a deterioration in inflation expectations, as shown by the Monetary Policy Committee of the Central Bank (Copom).
In addition, the Committee’s most recent minutes indicated that the Selic rate hike cycle should be slightly more intense and lasting than expected, reaching a rate above 12% p.a. in May — and going on so for some time.
The Ômicron variant has led to record numbers of Covid-19 cases, but hospitalizations and deaths have not kept up with this pace. In the December Report, we explained that we expect a negative response in activity indicators – especially services –, but that this movement should quickly reverse.
In the US, the recovery of the #labor market has been rapid. With employment and activity at more expressive levels, the Federal Reserve (Fed, central bank) has adopted an increasingly rigid discourse in relation to the fight against #inflation. The monetary authority intends to tighten financial conditions, which are highly stimulating.
In Brazil, the current cycle of high #interest rates was much faster and more intense than the market projected at the beginning of 2021. The high level, added to the presidential elections, should create a complex environment for risk assets, at the same time in which they can create investment opportunities, with attractive valuations in many cases.
Inflation has been an important thermometer for global markets. The rise in prices is linked to temporary factors – such as the cost of energy and the bottlenecks between supply and demand – in addition to the effects of the monetary and fiscal stimuli adopted.
On the stock exchange, it is worth highlighting the negative performance of the sectors that are more sensitive to social contact – such as aviation, entertainment and maritime transport, which had their performance linked to the discovery of the new variant.
In Brazil, the conjunction of rising inflation, GDP back below pre-pandemic levels and the discovery of the new variant of the coronavirus set the tone for the month, bringing even more volatility to the markets.
The challenging internal scenario also led to a significant reduction in the multiples of companies listed on the Stock Exchange. Many are even traded at a level below the worst moment of the pandemic, suggesting that a significant portion of the risks for assets may already be priced.
One of the most relevant issues for financial markets has been the discussion on how temporary inflation is affecting several countries, developed and emerging.
The worsening in inflation data can be attributed to shocks in the supply chain and reopening of economies. The sronger-than-expected persistence of inflationary pressure has led the main central banks to adopt stricter monetary policies than previously proposed.
The deterioration of the fiscal framework also had repercussions on monetary policy decisions in Brazil, with the BC opting to accelerate the hikes in the interest rate.
Despite the favorable external scenario, uncertainties in the fiscal scenario strongly impacted domestic risk assets, including the stock market – the Ibovespa had another month of declines, despite the strong performance of global stock markets, including emerging countries.
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.