Brazil financial markets are revving up for a promising week

RIO DE JANEIRO, BRAZIL – All eyes are turned to Wednesday, June 16, when the U.S. Federal Reserve (Fed) and the Brazilian Central Bank’s (BCB or Bacen) monetary policy decisions will be made.

Interestingly, despite their similar nature, these two events will have different possible outcomes. In the U.S., the debate over the slowing of asset purchases (tapering) should mark the meeting.

In Brazil, the focus of the issue lies not in the act, but rather in the monetary authority’s communiqué, which may be more contractionary.

European stock markets opened bullish this Monday, June 14, as did U.S. futures.

Between slaps and kisses

Amid anticipation in São Paulo’s vaccination calendar, which is positive, the market is focused on Brasilia, which is expecting a busy week.

As of tomorrow, June 15, the government will try to vote the Eletrobras (ELET3) Provisional Measure in the Senate, given that it expires on June 22 and there is some resistance in the House.

Another relevant factor will take place on Friday, when the Federal Supreme Court (STF) will judge a suit concerning the Central Bank’s autonomy – the market perceives autonomy as positive; therefore, changes in this respect could have negative structural impacts.

All of this while the Monetary Policy Committee (COPOM) is holding its meeting, likely to increase the benchmark interest rate by 75 basis points, setting it at 4.25% per year.

The main expectation is not on the decision itself, but rather on the accompanying communiqué.

The authority may remove the “partial adjustment” reference to interest rates, given that the IPCA (Extended National Consumer Price Index) has been above 8% over the past 12 months, the IGP-M (Market General Price Index) has risen by more than 37% and pressure from economic activity, which has been revised upwards in recent weeks.

Today’s IBC-Br (index of economic activity) may reinforce this idea, influencing the Central Bank to raise interest rates beyond neutral (between 5.5% and 6.5%, depending on the model used).

What to expect from the Fed?

At the international level, the big event this week will be the Federal Open Market Committee’s (FOMC) two-day meeting.

The Fed is being closely monitored to see how it deals with inflation signals and if it maintains its position that higher prices are transitory.

Until Wednesday, when the meeting is closed and the decision presented, investors should remain cautious. Greater volatility should only occur after the statement, particularly after the intervention of the institution’s chair, Jerome Powell.

The focus is not on short-term monetary policy, with the uneventful chance of an interest rate hike, given that the markets and the Fed are not concerned about inflation.

Alternatively, the focus is on talking about reducing asset purchases (tapering), as perceived in the reading of the last meeting’s minutes.

Many economists believe that a reduction in the level of asset purchases over the second half of the year is healthier than expected as the demand for liquidity in the U.S. economy begins to slow.

G7 with a positive outcome

The main meeting of the G7 – the group of the world’s seven largest industrial economies (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States) – held in Cornwall, England, flowed smoothly. Many subjects were discussed, from green economy to taxation.

However, the meeting failed to conceal the Sino-American tensions still present today.

Much attention was paid to U.S. President Joe Biden, who seeks to reaffirm the United States’ dominance on the global stage.

On the sustainability agenda, results were less promising than expected.

Governments risk losing a wave of investments unless they implement meaningful policies to address climate change in the wake of the pandemic.

The emission reduction commitments for 2030 or 2035 still stand and should guide the next decision-making, but further negotiations are not expected to be seen until November at the United Nations climate meeting.

On taxes, the world leaders formally endorsed the concept of a global minimum tax (a minimum tax rate of at least 15% for multinationals), to be brought to the G20 still in 2021.

With respect to China, Biden tried to persuade allies to join Washington in taking a tougher stance towards Beijing in its actions in Taiwan and Hong Kong – the upcoming events will be crucial for stability in the region.

Finally, two specific topics stood out:

(i) there is interest in building an alternative to the New Silk Road, also called the Belt and Road Initiative (BRI) – a massive Chinese infrastructure project that stretches across over 60 countries in Asia, Oceania, Africa and Europe; and

ii) the G7 economies also consider supporting the allocation of US$100 billion from the International Monetary Fund (IMF) to support vaccination and economic recovery in the neediest countries, in addition to donating vaccine doses, in line with what the U.S. has done.

The agenda for the start of the week is small, albeit significant.

Abroad, the European Central Bank (ECB) will feature statements by its members, as well as by the leader of the British monetary authority, the Bank of England (BoE). Neither of these statements are likely to offer the market any significant change from what it has already seen.

Industrial production in the Euro Zone, released in the morning, came in above expectations, growing 39.3% compared to April last year (base effect here, so growth was excellent).

In Brazil, the Focus Bulletin, the weekly trade balance, and the IBC-Br (proxy for the GDP) for April, which should grow 1.20% over the previous month, are the highlights.

Supply chain shortages will continue to be a hot topic during the second half of 2021. In recent months, there have been shortages of gas, gasoline, wood, chips, workers, and food, just to name a few.

With the U.S. fully reopening, demand for virtually everything is growing, which puts even more pressure on manufacturers who have cut production in the past year. The clash between supply and demand is inevitable.

While shortages will not last forever, the pandemic has exposed the fragility of global supply chains. Whether supply chains returning to normal will cause inflation fears to abate remains to be seen.

Investors fear that higher prices could prompt the Fed to reduce some of its stimulus measures. However, Fed officials have insisted that the acceleration in inflation is “transitory” and directly related to the peculiarities of the pandemic-era economy.

Data released during the U.S. summer will reveal whether higher inflation is more permanent than officials believed.