Weekly Report 130
✅ We expect the FOMC to announce a 25bps cut at the upcoming meeting, reflecting rising concerns over labor market conditions. The August Payroll report came in significantly weaker and added to downward revisions in previous months, reinforcing the view that the slowdown is broader and more consistent. This scenario confirms Powell’s assessment at the Jackson Hole Symposium, when he noted that risks to the maximum employment mandate had been intensifying and required greater attention from monetary policy. As a result, the balance of risks has shifted, with inflation still above target but not accelerating, while the labor market shows rapid and widespread deterioration. We therefore maintain our view of a 25bps cut in September, followed by consecutive cuts in October and December, compared with a previous expectation of only two cuts this year.
✅ In line with this new outlook for US monetary policy, we have revised our domestic scenario, with particular emphasis on the exchange rate. The prospect of faster Fed easing implies a globally weaker dollar, leading us to revise our DXY projection to 97. In Brazil, risk perception remains relatively stable, with no new fiscal shocks or political instability episodes that would justify additional risk premia. We therefore calibrate our CDS projection to 140bps, which together with a weaker DXY led us to revise the exchange rate to 5.50 reais per dollar, compared with previous estimates of 5.65 in 2025 and 5.70 in 2026.
✅ In terms of monetary policy, we expect the Copom to keep the Selic rate at 15.0 percent at the upcoming meeting, reinforcing a hawkish tone even in a more benign inflation environment . Recent communication has reiterated the preference for maintaining high interest rates for an extended period until greater confidence is achieved regarding the convergence of inflation to target. The assessment is that, although expectations have declined in recent weeks, full anchoring has not yet been achieved and remains central to the reaction function. The Central Bank’s projections should be eased by currency appreciation and lower expectations, opening room for downward revisions. Nevertheless, maintaining a hawkish stance is justified by the need to consolidate re-anchoring, by the expansionary bias of fiscal policy that continues to support domestic demand, and by an adverse external environment, particularly in the United States. In this context, the Copom is likely to acknowledge progress on inflation but maintain the strategy of elevated rates until stronger conviction is reached regarding sustained convergence and full anchoring of expectations. We therefore maintain our view that the easing cycle should only begin in December 2025.
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