SHITSHOW: YESTERDAY’S COPOM WILL CREATE GREAT DISCOMFORT
Today, the local market is likely to face a correction. This is not so much due to the decision of the Monetary Policy Committee (Copom) itself, but to the evident disagreement that marked the conclusion of the meeting and the way in which this was communicated, generating controversy and directing attention to the minutes that will be published in the next week, reducing the relative importance of the April IPCA, which will be announced tomorrow.
I will discuss these dynamics more below. Abroad, the day also presents challenges, with Asian shares closing lower this Thursday.
Highlights on the global agenda are the surprising increase in imports in China in April, which doubled forecasts, reaching 8.4%, and the developments at the Bank of England meeting, which released its decision on interest rates this morning.
In the United States, calm on Wall Street continued for the second day in a row on Wednesday, but American futures fell again this morning, in a movement similar to that seen in European markets.
In the commodities market, oil once again exceeded US$84 per barrel, while the price of iron ore remains above US$115 per ton.
Seeing…
00:41 — Congratulations to those involved: they met for two days to make such a decision
In Brazil, the Monetary Policy Committee (Copom) opted last night to reduce the Selic rate by 25 basis points, adjusting it to 10.50% per year.
This adjustment represents the first slowdown in the pace of cuts since the Central Bank began reducing interest rates in August 2023.
In the statement released, Copom highlighted that the international scenario has become more adverse, requiring greater caution on the part of emerging countries and chose not to signal the next steps in relation to interest rates, emphasizing the need for a contractionary policy, indicating the end of forward guidance.
This movement, although expected by the market and justified in the face of uncertainties (although there were those who defended a 50-point cut in the market), was contrary to what was agreed at the last meeting (in theory, bad for credibility), maintaining Brazil’s real interest rates. at a considerably high level (there is no economy that can survive more than two years with short real interest rates above 5%).
However, the real issue emerged from the result of the vote, as I commented was possible yesterday.
The Copom’s decision was not unanimous: five directors, including president Roberto Campos Neto, voted for the 0.25 point cut; four other directors, including monetary policy director Gabriel Galípolo, favorite to succeed Campos Neto, defended a 50-point reduction. Notably, all of the directors nominated by the current president supported a more substantial cut.
Even Paulo Picchetti, seen as the most technical indication of the current government and theoretically most aligned with the BC’s current management, voted for a 50-point cut, possibly envisioning the presidency of the bank.
The consequence is that the hawkish tone of the statement and decision (slowing down the pace of cutting) will not have the expected effect.
Note: a divided Copom is not necessarily problematic, as divisions are common among global monetary authorities; however, the way this division occurred is troubling. First, the decision was split by just one vote, indicating what is called broad dissent.
Second, the statement did not offer explanations for the divergent votes, which increases expectations (and anxiety) for the minutes of the next meeting, scheduled for next week.
Additionally, this decision could increase tensions in Brasília, with the government possibly dissatisfied with the outcome, although it had already expected it, and with uncertainty about the direction of the BC’s next management as the current president’s term ends.
The market fears that the new management of the Central Bank may adopt a more politicized stance, given expectations that are already quite volatile.
The interest rate cut cycle has not yet ended and we will still have two or three more cuts in 2024 of 25 points each, but the situation is not the best. In short, the decision was problematic and the market is likely to react negatively today.
01:59 — Another warm day
In the US, the stock market remained relatively calm for the second day in a row, with mixed results and a light journey in terms of economic news. The Dow Jones Industrial Average ended up 0.4%, while the S&P 500 remained flat.
With no significant economic data announcements scheduled for this week, it appears that stocks are being influenced more by technical factors, especially after a rally the previous week driven by Apple’s financial results and a weaker-than-expected jobs report.
This calmer environment is likely to persist until April’s inflation rate is expected next week.
Ideally, we would see further consolidation in the market from this point, which could lay the foundation for the next bullish technical formation for the S&P 500, a scenario that has already proven beneficial at times since the declines seen between August and October of the year. past.
As for the day’s agenda, although there are some financial results of interest, such as those from Brookfield, Constellation Energy, Roblox and Warner Bros. Discovery, there is nothing particularly extraordinary.
Futures opened lower, with no specific catalyst to boost sentiment.
02:45 — The Fed’s next steps
In late 2023, comments from several members of the Federal Reserve suggested that they believed they had achieved success in combating inflation, a narrative that sounded almost like “mission accomplished.”
This perception was not unfounded: over the previous year, data indicated economic growth in the US that pointed to the possibility of a “soft landing”, characterized by declining inflation, robust economic growth and low unemployment.
This optimistic scenario led many Fed officials to adopt a calmer stance and anticipate a possible change in monetary policy.
In fact, futures markets have even predicted a reduction of up to 150 basis points in the federal funds rate for 2024.
However, the scenario has changed considerably since then. Inflation proved to be more persistent than expected in the first quarter of the year, while economic growth remained strong.
As a result, Fed officials have adopted a decidedly more cautious tone. Currently, there is almost unanimity among them that it will take more time to control inflation and that interest rates will not be reduced anytime soon.
Futures markets now project only about 0.5 percentage points of cuts for this year.
The next FOMC meeting is scheduled for June 11-12, and cuts are unlikely to be made at that meeting.
However, depending on the economic data that emerges by then, one can expect at least some sign that a cycle of cuts may begin. A possible first cut in September would be welcome.
03:32 — What about the Bank of England?
Earlier today, the Bank of England released its decision on monetary policy. As widely anticipated, the interest rate was held at 5.25% for the sixth consecutive time, marking the highest level for the pound in the last 16 years.
However, unlike the US Federal Reserve, the Bank of England may be closer to starting a rate reduction cycle.
Investors are eyeing the June meetings as a possible occasion for the first interest rate cut, while for the Fed, the cut is more likely to come in September.
For example, Susan Collins, president of the Boston Fed, has indicated that US rates may need to remain at their current level for longer than initially expected to contain demand and ease inflationary pressures. This position differs significantly from the more open stance adopted by European authorities.
Yesterday, for example, Sweden’s Riksbank followed the Swiss National Bank in opting to reduce interest rates. Although the short term still presents challenges, a change in interest rate policy may be close.
This would be very beneficial for interest-sensitive assets, such as those in emerging markets, including Brazil.
04:28 — Perspectives for the carbon market
In the first quarter of 2024, carbon credit emissions grew by around 4% compared to the same period of the previous year, totaling 91 million tons of carbon dioxide equivalent (tCO2e) in new assets issued.
Brazil, with its vast potential, is positioned to become an influential leader in the global carbon credits market, despite facing several challenges.
Since the Rio-92 Conference and the signing of the Kyoto Protocol in 1997, it has been established that developed nations would finance the preservation of forests and the reduction of greenhouse gas emissions.
However, even after around thirty years, many uncertainties remain about how to effectively offset carbon sequestration and other environmental services, highlighting the need for a substantial expansion of this market to achieve global climate goals.
In the segment of carbon credits related to forests, Brazil has the capacity to assume a leadership position. This objective can be achieved by forming a coalition with other countries rich in tropical forests and establishing their own certification and registration system.
Looking ahead, it is crucial that Brazil leads this agenda, starting by establishing dialogues with countries that have large expanses of forest and agricultural land to develop metrics and methodologies that value environmental services as viable solutions for decarbonization.
By implementing these measures, Brazil can not only maximize its broad potential in the carbon credits market, as it already leads this market in South America, supporting 40% of total projects in the region.
Tags: Stock market today Copom drops badly Ibovespa drops thousand points dollar rises
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