Reacting to Copom’s decision, players see possibility of more intense cuts in the Selic later this year
08/04/2023
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Daniel Weeks — Foto: Silvia Zamboni/Valor
Although the Central Bank’s Monetary Policy Committee (Copom) has indicated in its communication that it intends to follow the pace of 50 basis points in future reductions of the Selic policy interest rate, the market has not fully bought the idea and already embeds in prices a not insignificant chance that the committee will accelerate the pace of decline of the basic rate this year. Short-term interest rates plummeted, but with softer communication and a spiking environment for Treasuries yields, local long-term rates rose sharply, and the exchange rate rose almost 2% and approached R$4.90 to the dollar.
Even with a very clear signaling as to the next steps of interest rates, Copom opened space for the market, already in the initial reaction, to see the chance of the Selic falling even faster. For the September meeting, the interest rate market prices 68% of the possibility of a 50 bp drop in the rate, against 32% of the chance of a 75bp cut.
After the Copom decision, most market economists switched to the scenario telegraphed by the committee, which includes cuts of 50 bp by the end of the year, which would take the basic interest rate to 11.75%. The yield curve, however, already prices a Selic between 11.25% and 11.5% this year, in a clear sign that the market sees relevant chances of the Central Bank choosing to accelerate the pace of interest rate easing.
“Given that the 50 bp cut pace has been signaled, the market will put some probability on something bigger. In my scenario, I continue to see an improvement in core inflation and service prices and this will make room for an acceleration,” points out Daniel Weeks, Garde Asset’s chief economist, who projects a 50 bp reduction in September, followed by 75 bp drops in November and December, which would leave the Selic at 11.25% at the end of the year.
“With the improved scenario we had and expectations re-anchoring more quickly after the target was set, it made sense to me for the Central Bank to deliver a 50 bp cut. I already imagined dissent, but I believed in a score that was not so tight,” he says. For him, given that the directors, in consensus, believed that the pace to be employed is 50 bp, “it did not make that much difference to start the cycle with a smaller or larger cut”. Mr. Weeks, however, says he is more optimistic about the pace of interest rates, but not about the level of the rate at the end of the cycle, projecting the Selic at 9% in 2024.
In this context, the interbank deposit rate (CDI) for January 2025 fell to 10.505% from 10.675% on Wednesday and the CDI for January 2033 jumped to 10.96% from 10.74%. The moves indicate that the yield curve has steepened, meaning that the distance between short and long rates has increased. Higher long-term interest rates tend to play a restrictive role for activity.
For Victor Candido, chief economist at RPS Capital, a movement to increase the slope of the yield curve was more than expected in Thursday’s session. “But I think the natural thing would be for the short rate to fall 0.2 point and the long rate to retreat 0.05 point. The rise in long interest that we are seeing today [Thursday] is much more linked to the behavior of Treasuries,” he says.
With a relevant increase in the slope of the yield curve in Thursday’s trade session, the market indicated, in a first reading, that the more “dovish” bias (prone to lower interest rates) adopted by the monetary authority on Wednesday could lead to higher interest rates in the long term, in the face of greater distrust with the convergence of inflation to targets. Thus, the pricing in of inflation in the years ahead rose. The benchmark inflation index IPCA contained in the NTN-B ((National Treasury note) for August 2026 rose to 4.70% from 4.57%, and inflation priced by the NTN-B for August 2028 rose to 5.05% from 4.89%.
“The decision reallocated the focus within the committee, gave weight to the newly appointed directors and indicated how the decision-making process will take place in upcoming meetings. It also made the guidance of additional 50 bp cuts less convincing,” says Bruno Schiavinato, Santander’s FX trader, in a commentary.
“There are, of course, rewards from a larger cut, mainly a better political reaction, less friction with the government and, perhaps, a clearer path in Congress for the approval of reforms and important economic measures,” says Mr. Schiavinato. He, however, says he believes that, at the moment, the stance towards the real should change according to the change in monetary policy.
On Thursday, the real was the worst currency on a list comprising the 33 most liquid currencies tracked by Valor. The exchange rate rose 1.96%, quoted at R$4.8981 to the dollar, after briefly reaching the R$4.9001 level at the high of the day.
“We abandoned the long position in real and short position in dollar and became neutral,” says Mr. Schiavinato, pointing out that the exchange rate rose R$ 0.20 from recent lows and has become more susceptible to being a candidate to serve as a hedge for interest rate options or long position in local shares.
A more downward trend for interest rates by the Central Bank helps to put pressure on the exchange rate, bearing in mind that, in the United States, the indication given by the Federal Reserve (Fed) is to maintain interest rates at high levels for a prolonged period. With the interest rate differential on a downward path, the market may begin to see the attractiveness of the real falling, which may weigh on the performance of the Brazilian currency ahead.
It is worth noting, however, that the performance of international markets was a key determinant of local dynamics in Thursday’s session. Yields on ten-year Treasuries jumped to their highest levels in nine months, driven by Japan’s long-term interest rates, which soared to their highest level since 2014. As a result, stock markets fell in New York and the dollar rose across the board.
Here, the Ibovespa did not find space to surf the interest rate cut movement and thus ended the day down 0.23% at 120,586 points. In the view of César Mikail, equity manager with Western Asset in Brazil, the market anticipated part of the gains in recent months with the expectation of the cycle of interest cuts. He, however, still sees room for the stock market to advance.
“In addition, there is now a natural concern about a possible rebound in inflation, but that should only affect variable income assets if long rates worsen in the coming days,” he says. Long-term interest-sensitive stocks suffered in Thursday’s session, such as Magazine Luiza’s common shares, which fell 5.11%, while those of Méliuz dropped 6.24%.
According to Mr. Candido, with RPS, the market works today with a Selic around 9% at the end of the cycle. “In this case, I think that real interest [NTN-Bs] would be more interesting, especially if we are facing a more ‘dovish’ Central Bank and with the possibility of a reacceleration of inflation,” he points out. For him, however, the stock market still trades at very depressed multiples and, thus, there are interesting opportunities. “I think the domestic securities, linked to interest rates, still have a lot of room to go forwards.”
*Por Victor Rezende, Gabriel Roca, Matheus Prado, Arthur Cagliari — São Paulo
Source: Valor International