What to expect from U.S. Fed and Brazil’s Copom monetary decisions on today’s Super Wednesday

RIO DE JANEIRO, BRAZIL – After the week started with the Evergrande crisis, investors now focus on important decisions about interest rates. This Wednesday, September 22, the central banks of the United States and Brazil will release their monetary policy decisions – when the dates coincide, the day is known in the market as “Super Wednesday”.

On this ‘Super Wednesday’, Fomc – the Federal Reserve (Fed) committee responsible for deciding the interest rate in the U.S. – presents the results of its meeting at 3 PM (EST). The Central Bank’s Monetary Policy Committee (Copom) announces its decision in Brazil after the market closes, starting at 6:30 PM.

The majority expects Copom to raise the benchmark Selic rate by one percentage point, from 5.25% to 6.25% per year, the fifth consecutive increase. Even so, a minority is still predicting that Copom will be even more challenging: a Bloomberg survey shows that, among 32 economists, 28 expect a hike of 1 percentage point (p.p.), three of 1.25 p.p. and one of 1.5 p.p.

Most economists base their projections on the recent statement of the president of the Central Bank, Roberto Campos Neto. In the MacroDay event, promoted by BTG Pactual last week, Campos Neto stated that the Central Bank is monitoring the components of the inflationary process and the changes in the short term, but that there will not always be “changes in the flight plan”, whose focus is on a “long horizon”.

In the market, the statement was interpreted as a sign that the Selic would be raised by one percentage point – as already indicated in the last statement – even with inflation rising above expectations.

IPCA, the official inflation index in the country, surprised the consensus market forecasts and rose more than expected in both July and August, leading several banks and analysis houses to revise their projections. Campos Neto said, however, that the Central Bank would not necessarily be influenced by “high-frequency data”.

WHAT HAPPENS WITH STOCKS

At first, the decision to raise the Selic rate by 1% favors the stock market, which would suffer more if interest rates were higher. Still, there is the risk that a softer tone in the communiqué could give the impression that the Central Bank is not raising interest rates to the extent necessary to contain inflation. The result would be stress in the yield curve, damaging the exchange rate and the stock market.

“The challenge for the Central Bank lies in adopting a tone that avoids a very significant increase in expectations around the interest rate since there is a lot of uncertainty about both the duration of inflationary shocks and whether expectations for 2023 remain anchored,” say the analysts at Modalmais in a report.

Modalmais expects the Central Bank to raise the Selic to 8% by the end of 2021. Among the houses consulted by Bloomberg, most projections put the Selic at 8.25% by the end of the year.

TAPERING IN THE U.S.?

In the United States, there is no doubt among analysts that interest rates should be kept close to zero, in the range between 0% and 0.25%. The big question is whether the monetary authority will start the process known as “tapering,” i.e., reducing the volume of asset purchases. This policy – as well as low-interest rates – is used to stimulate the American economy.

The dilemma is to understand whether the economy is strong enough to stand on its own two feet after going through the most acute phase of the pandemic. One of the primary data used by the Fed to understand the level of economic recovery is the official report on non-farm employment (payrolls) – the most critical data from the American labor market.

Since the last meeting, two payrolls have been released that sent opposite signals to the market. First, a positive surprise in the July release: 1.053 million jobs were created against an expected 870 thousand. In sequence, frustration arose after the August payrolls created 235 thousand jobs against expectations of 735 thousand.

According to analysts from BTG Pactual digital, the weak result in August reduced the probability that the tapering would be announced already in today’s decision. “The week’s meeting is the opportunity for the committee to adjust its language, suggesting that if the economy evolves as forecast, it is appropriate to reduce asset purchases ‘soon’ (an expression commonly used to draw attention to the next meeting),” they say in a report.

On Wednesday, the Fed will also release its summary of economic projections, with its expectations for the economy in 2022, 2023, and, for the first time, 2024. It is something that implicitly reveals the paths of monetary policy.

Following the report’s release, the Fed’s president, Jerome Powell, will give the customary interview at 3:30 PM, providing more clues about the direction of the American monetary policy.

WHAT ABOUT BRAZIL?

The analysts at BTG Pactual digital project that the scenario will be optimistic for Brazil and the Real (R$) if Powell’s statement and speech show a reduction in the concerns with inflation (which continues to be under pressure, but slowing down) and offer a more significant problem with the recovery of the labor market: these would be two signs that the stimulus will continue for longer than expected.

On the other hand, if the Fed recognizes an advance in the labor market, the dollar could become more robust. The situation is complicated for the Brazilian stock market if an interest rate increase is announced for the beginning of 2023 or even 2022. However, the worst-case scenario of all would be the immediate announcement of tapering without any prior signaling.

This, however, is not likely to happen. A Bloomberg survey of 51 economists showed that 65% of them expect the announcement of tapering after the next meeting, which takes place on November 2-3.

The survey also predicts that the U.S. central bank should keep interest rates near zero until 2022 and make two increases of 0.25 percentage points by the end of 2023.

It is worth remembering that the Fed is not conditioning the end of tapering on the increase in interest rates, i.e., interest rates will not start rising immediately after the end of the withdrawal of the other stimuli. This is another point that can give more impetus to the Brazilian stock market.