Future interest rates fell sharply, especially in intermediate contracts, which at the lows of the session dropped more than 20 basis points. On a day with an empty local agenda and news, the movement was determined by the increase in risk appetite abroad, where the perception that the space for tightening interest rates at a global level is closing fed the flow to emerging assets. Liquidity, however, was below standard. In any case, the short end already includes a marginal probability that the Copom will inaugurate the Selic cut cycle in August with a dose of 50 basis points. In the accumulated result for the week, rates collapsed across the board.
The Interbank Deposit (DI) contract rate for January 2024 ended at 13.02%, the lowest closing level since 3/22/2023 (13.00%), from 13.092% in Wednesday’s adjustment, reaching touch 13.00% at the low. The DI for January 2025 ended at 11.07%, at the lowest level since 7/2/2022 (11.02%), from 11.25% in the last adjustment. The DI rate for January 2027 closed at 10.50% (from 10.64% in the previous adjustment) and the DI rate for January 2029, at 10.84% (from 10.94%). In the week, the short end had relief around 20 points and the intermediate, 40 points. Long rates gave way by around 25 points.
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After last Wednesday’s adjustment trading session, when short rates only had a downward bias and long rates rose, today the curve resumed its “natural” downward trend early on, following external events and ignoring the opening of the Treasuries Curve.
The chief strategist of Banco Mizuho, Luciano Rostagno, saw today in the local market a “catch up” to the reaction of assets yesterday to the strong increase in unemployment aid applications in the United States in the last week, which helped to strengthen the bets on maintenance by the Federal Reserve at its June meeting, which had been shaken by Canada’s unexpected decision to tighten its monetary policy. In addition, last night China’s inflation data came out lower than expected, reinforcing the idea that world demand is lower.
“It is a scenario of greater global slowdown that reduces concern about the Fed’s next decision. When looking at the interest rate side, the market is pricing the glass as half full”, he commented. He points out that the magnitude of the drop in rates today may have been amplified by reduced liquidity. In any case, it is a scenario that attracts flows to emerging markets, as can also be seen in the exchange rate. The dollar closed below R$ 4.90, at R$ 4.8763.
With a decisive role in the drop in inflation, the help of the appreciated real and the retreat in commodity prices encourage the market not only to consolidate the expectation that the Selic easing season will begin in the August Copom, but now they already appear in the betting curve in the reduction of 50 basis points. According to Rostagno, DIs are priced at 26 basis points for a drop, which represents a 4% chance of a 50-point cut, against a 96% chance of a 25-point cut. For September, the expectation of 50 points is practically consolidated by the pricing of -46 points. By the end of 2023, the curve projects a rate of 11.81%.
For the June Copom, pricing is maintenance at the current 13.75%, but if the BC is in line with the market’s thinking that in August it is already possible to start lowering the Selic, this month it will probably adjust its communication to leave the door open to start reducing the rate.
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