Weekly Report 132
✅ Copom’s strategy of maintaining a hawkish stance for a prolonged period led us to revise our Selic outlook. Given the Copom’s more hawkish tone than expected, we postponed our projection for the start of rate cuts from December 2025 to January 2026, maintaining the 2026 terminal rate at 12.25%, with the risk that cuts may only begin in March, if disinflation and re-anchoring of expectations prove more limited. The minutes reinstated the possibility of raising rates if deemed appropriate. The Monetary Policy Report reinforced this stance, presenting inflation projections above target through 1Q28 (3.1%) and a more positive output gap, though still pointing to a faster deceleration than implied by market measures. President Gabriel Galípolo and Director Diogo Guillen reiterated a data-dependent stance, assessing whether the current Selic level is sufficient to converge inflation.
✅ We continue to assess that the scenario should evolve favorably for inflation through year-end, alongside a moderation in economic activity. This view is reinforced by the September IPCA-15 release and the ongoing moderation in FGV industry and construction surveys. The September IPCA-15 came below the market median (BBG: 0.52%) but above our forecast (0.42%), posting a 0.48% m/m increase. The downside surprise for us and the market came from core services, consistent with a marginally more benign composition.
✅ Despite the Copom’s less favorable assessment of external conditions, August current account results came in better than expected, while weaker economic activity reduced federal revenues.
✅ U.S. inflation shows mixed composition; 2Q25 GDP revised higher due to services. The Fed’s preferred inflation index, core PCE, reinforced the picture of moderation, with services remaining elevated and goods weakness persisting. On activity, services consumption and nonresidential investment supported resilience in domestic demand, with the third estimate of 2Q25 GDP revised up to 3.8% (from 3.3% in the second estimate).
✅ Fed policy outlook: members expose discussion on pace and terminal rate. The newest Federal Reserve Governor, Stephen Miran (the most dovish voter), continues to advocate for more aggressive cuts, while M. Bowman (dovish voter) sees room to accelerate the pace of rate cuts only if the labor market continues to deteriorate. Fed Chair Jerome Powell (neutral/dovish voter) and A. Goolsbee (neutral voter), in turn, appear more cautious
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