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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.