by José de Castro
SAO PAULO (Reuters) – Financial markets in Brazil had a bitter Tuesday, leading losses among global peers amid a high level of volatility, in a deep adjustment after harsh speeches by two central bank officials called into question the perspective of the end of the monetary tightening cycle.
DI rates with maturities within the relevant horizon of monetary policy rose by almost 40 basis points, a pace that, if maintained, would represent the highest increase since October 2021. The dollar climbed above 5.25 reais at the maximum, leaving the real in the worst position among rivals in the world currency market. The quote ended at the highest value in a month.
In the stock market, the Ibovespa suffered the biggest drop since June, of more than 2%, in the worst performance among Western peers. Discretionary consumption stocks, more vulnerable to higher credit, plummeted by more than 4%.
The significant price correction took place in the midst of an unstable mood abroad, still due to fears of interest rate hikes that would suffocate economies. But the deterioration in domestic assets was more visible, in a clear reversal of the more benign behavior of a few weeks ago sponsored, in part, by the prospect that interest rates around here would stop rising.
Market comments shortly after the BC’s last monetary policy statement, in early August, were that Brazil would become more attractive from then on, since interest rates would tend to fall, which would raise returns via carrying fixed-income securities.
The greatest appeal of Brazilian debt would thus call for international flow, increasing liquidity in foreign currency and exerting downward pressure on the dollar.
The impact of the idea of ending the interest rate hike had also boosted shares on the Brazilian stock exchange, since the discount to present value would stop increasing with interest stability – and could fall when the BC started the Selic fall cycle, which some houses already predicted for the first half of 2023.
“But the BC has now indicated that the Selic drop process may not happen as the market prices,” said Filipe Villegas, a strategist at Genial Investimentos, for whom BC President Roberto Campos Neto tried to convey a “quite a lot” the day before. in line with that being issued by colleagues from the main global central banks.
On Monday night, Campos Neto said that the Central Bank is not thinking of lowering interest rates at this moment, but of converging inflation to the targets, stressing that the situation inspires care and that the battle against rising prices in the country is not won. .
This morning, the director of Monetary Policy at Bacen, Bruno Serra, was even more explicit and said that the bank will discuss a possible residual adjustment in the basic interest rate this month, adding that the process of controlling inflation in Brazil is still very incipient.
Both adopted tonics considered more “hawkish”, jargon of the financial community to explain an approach more inclined to the contraction of monetary policy, implying liquidity restriction.
“The BC’s objective with these events yesterday and today seems to be much more to contain certain market expectations regarding the cycle of monetary relaxation in the next year”, said Sérgio Goldenstein, head of the strategy area at brokerage Renascença.
He explains that, with the limitation of the closing of the yield curve, there is the effect of holding the fall of the real interest rate (discounting inflation), which could, thus, reinforce the anchoring of inflation expectations.
“I still consider it more likely that the BC will do nothing at the September meeting. The idea, it seems to me, is more to hold the curve, remove the built-in cuts for next year, than to signal an adjustment of 25 basis points this month”, added the former head of the Open Market Operations Department (Demab) at the Bacen
The spread between DI January 2027 and January 2024 maturities yielded 10 basis points, deepening the curve inversion to -1.475 percentage points, equaling the most negative rate in at least one year (comparable period). The inverted curve is a classic symptom of moments of strong monetary tightening.
The “hawkish” statements confirm Rio Bravo’s expectation of a 14% rise in the Selic rate this month, said Luca Mercadante, an economist at the asset manager, who sees it as “plausible” to postpone the beginning of the interest rate fall to the end of the second quarter of 2023
“Services inflation is still under pressure, the job market is very strong, there was a (positive) surprise with GDP… In addition, (there is) a greater fiscal impulse in the second half of the year, due to the increase in spending on social services ,” Mercadante said, enumerating cautionary factors on the price side.
According to B3’s digital options, the probability of maintaining the basic interest rate at 13.75% per year on the 21st fell from 81% the day before to 66% at the end of this Tuesday afternoon. At the same time, the 0.25 percentage point increase chance to 14% jumped from 15% to 30%.
In any case, Rio Bravo officially continues to see the beginning of the interest rate fall cycle at the end of the first quarter of 2023. However, it recognizes the probability of starting at the end of the semester, targeting the effects of monetary policy on inflation expectations for 2024.
The one-day interbank deposit rate (DI) on the B3 curve – an annualized measure of the interest negotiated between financial institutions – rises until June 2023 and starts to fall in July. On Monday, the rate peak on the curve was reached in March. In other words, the market is postponing the beginning of the Selic fall cycle.
The strong adjustment in the DI market was accompanied by a boosted business volume. A total of 4.720 million DI contracts changed hands, 85% above the daily average for a month.
LOSSES
In fixed income, said Maria Cândida Naegele, partner and investment advisor at HCI Invest, investors who have purchased products linked to the IPCA for a longer time may suffer greater losses, as the BC’s harsher tone may strengthen the process of convergence of inflation to goal. “A lot of people were hoping to get out (of the position) with a premium, but that could take longer to happen.”
Naegele sees, with the most recent indications from Bacen authorities, important chances of a 0.25 percentage point increase in the Selic rate in two weeks’ time.
“I was expecting, from everything you read about the BC, the end of the cycle now and the beginning of the fall around the third quarter of 2023. But that may not happen, that it will be closer to the end of next year.”
Fixed-rate government bonds maturing in one year or more went on Tuesday for the biggest daily drop since March.
Anbima’s IRF-M 1+ index –which tracks LTN and NTN-F market prices exchanged in the secondary market– had a drop of 0.5830% this Tuesday. If this pace is maintained, it will have been the biggest drop since the 0.6102% on March 7th.
The BC’s greater demonstration of concern with inflation and the signs of seeking convergence of the rise in prices to the target weighed on bonds with yields linked to the IPCA – a reference for the target regime.
The IMA-B 5+ –which tracks NTN-B maturing from five years onwards– dropped 0.8012% on Tuesday afternoon, until then the biggest daily drop since August 16 (-0.882%).
(By José de Castro; edited by Isabel Versiani and Luana Maria Benedito)
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