Ibovespa Climbs Despite Fiscal Concerns, Lula’s Remarks, and Inflation Data

On a turbulent trading day, the Ibovespa index closed with a 0.25% gain, ending at 122,641.30 points, a rise of 309.91 points.

This outcome emerged in the final trading minutes amidst the release of the IPCA-15 inflation index and an interview with President Lula.

Additionally, it coincided with a National Monetary Council (CMN) meeting and international market fluctuations.

Concurrently, the commercial dollar surged by 1.20% to R$5.51, peaking at R$5.52 during the session. Future interest rates (Dis) consistently rose across the board.

Globally, the dollar strengthened, while domestic factors led to the real’s depreciation.

In an interview with UOL before market opening, President Lula asserted, “I guarantee the minimum wage will remain untouched during my presidency.

The minimum wage is essential for survival. Penalizing the lowest earners will not solve Brazil’s economic issues.”

Market participants were disappointed by the president’s stance, hoping for greater fiscal flexibility amidst ongoing challenges. Economist’s perceptions of fiscal policy worsened from April to May.

In the latest Pre-Copom Questionnaire (QPC), 78% of 111 respondents reported worsening fiscal conditions, while only 2% reported improvements and 20% noted no change.

Expenditure Reviews and Economic Team Actions

In the late afternoon, Treasury Secretary Rogério Ceron announced that the economic team, with Lula’s full support, is reviewing public expenditures to align with the fiscal framework.

This announcement contributed to the dollar’s rise, according to StoneX’s Market Intelligence Analyst Leonel Mattos.

There is a heightened perception of risk for Brazil, and even a softer June IPCA-15 reading did not shift market sentiment.

Mattos described the IPCA-15 reading as mediocre: “It wasn’t low, but not among the highest monthly increases.

The core was slightly better. The data isn’t benign and reinforces negative inflation expectations, suggesting higher-than-expected inflation in 2024, 2025, and 2026.”

Conversely, SOMMA Investimentos Chief Economist César Garritano saw the IPCA-15 as relatively benign for inflation.

He noted that, except for May’s IPCA result, the previous four official inflation prints were relatively favorable.

Garritano expects a slight deceleration in the June IPCA compared to the current IPCA-15 but agrees with Mattos that significant future inflation concerns remain.

Lula’s Remarks and Inflation Targets

Lula faced criticism for his remarks. Necton/BTG Pactual Superintendent Marco Tulli stated, “Without the president’s comments, we would have had another positive day.”

Lula also emphasized his independence in appointing the Central Bank president and expressed support for Finance Minister Haddad, despite occasional disagreements.

Additionally, the government issued a decree modifying the inflation target system, effective January 1. Brazil will adopt a “continuous target” for inflation, set by the CMN.

International Markets and Stock Performance

Abroad, Nvidia‘s strong performance helped New York indices recover in the afternoon and end with gains. Domestically, Vale (VALE3) rose by 1.24% due to higher iron ore prices.

Suzano (SUZB3) and WEG (WEGE3) also contributed to Ibovespa’s positive close, with gains of 2.23% and 0.91%, respectively.

Petrobras (PETR4) edged up by 0.16% as international oil prices saw slight increases.

São Martinho (SMTO3) gained 0.94% following a buy recommendation from a major bank, while BRF (BRFS3) increased by 1.44% after analysts raised its target price.

Conversely, the financial sector weighed down the index, with Itaú Unibanco (ITUB4) dropping 0.18%.

Bradesco (BBDC4) managed a 0.24% gain, with Genial Investments forecasting profitability recovery in the coming quarters.

Airline stocks plummeted after the IPCA-15 release and the dollar surge, with Azul (AZUL4) falling 5.56% and Gol (GOLL4) dropping 43.92%, breaking below R$1.00 to R$0.98.

Broader Economic Context

Federal public debt rose by 3.10% in May to R$6.9 trillion, while industrial confidence improved for the third consecutive month, rising 0.4 points in June, according to FGV.

On Thursday, Brazil will release producer inflation and caged employment data, while the US will publish a new GDP estimate for Q1 2024. Stability in the markets is not anticipated.

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