Copom and Fed to adopt cautious tone next week – 05/02
Next week, the Brazilian Central Bank should slow down the pace of monetary tightening, but with a still tough tone, given the persistent unanchoring of inflation. Since the last Copom meeting in March, asset pricing has changed significantly, following the announcement of US reciprocal tariffs, with appreciation of the Brazilian currency and a drop in commodity prices. Despite this, market projections remained practically unchanged and current inflation remains at a high level, with an increase in the headline and core average in the 3-month average SAAR, in the last 45 days. Therefore, we expect an increase of 0.50pp at this meeting and a final increase of 0.25pp in June.
In this sense, the labor market data released this week reinforced the perception that consumption should remain resilient, although economic activity shows a gradual slowdown. The unemployment rate was in line with expectations (7.0%), but incomes continue to show unfavorable dynamics, as do Caged admission salaries, which recorded a new increase in the margin. It is also worth noting that credit statistics showed an increase in concessions, stability in the default rate and a decline in household debt. We therefore reinforce our view that Copom should adopt a more hawkish and data-dependent stance, despite recognizing that a terminal Selic rate below our baseline scenario (15.00%) has become more likely, mainly due to the external scenario.
Finally, in the external environment, the highlights were the results of the labor market and the US GDP, which brought mixed signals. Starting off the week’s releases, the JOLTS showed a lower-than-expected job opening in March, with a downward revision in February and a lower ratio between job openings and unemployed people. In the same vein, net ADP creation was a significant downside surprise in April, with a sharp slowdown in the services sector, pointing to a moderation in the pace of the labor market. GDP also fell sharply in the quarter, with a major contribution from the increase in imports and inventories, in anticipation of Trump’s trade tariffs. Thus, we foresee a Fed Funds cut this year, but only in September, considering the bullish surprise in April’s Payroll, which resulted in an increase in the 3-month moving average, indicating a still dynamic market, despite the other indicators.
For more details, please check our Weekly Report 111.
