Porto Alegre, April 9, 2024 – The week brought some important variables to markets. Growing tensions in the Middle East with the resulting rise in oil prices contribute to agricultural commodity segments, such as ethanol and soyoil. The lag in fuel prices in Brazil compared to abroad demonstrates the government’s strong political interference in fuel prices, and a correction of these levels should result in higher inflation. Employment data in the United States, very strong as a whole, eliminate the chances of cuts in US interest rates in the first half of the year, perhaps not even in the second one. Finally, the pre-planting situation in the United States, in which the seasonal price cycle will fluctuate in line with the weather, as well as the climatic situation for Brazilian second-crop corn. Brazil’s 2024 crop now has two contrasting situations. An exceptional condition in Mato Grosso and Goiás and a very worrying condition in Paraná and a large part of Mato Grosso do Sul. The balance of this situation should continue to push Brazil toward the need to export at least 40 mln tons a year, and prices should converge to port levels at harvest.
Last week marked expectations regarding US employment data. The speech by the Fed chair did not change the outlook for interest rates at all, as the statement remains the same, waiting for economic indicators to take a safe position on the timing of the interest rate cut. So, the market focuses on indicators.
The number of new unemployment insurance claims in the United States rose by 9,000 to 221,000 in the week ending March 30, after reaching 210,000 the previous week (revised data), according to Labor Department statistics adjusted for seasonal factors. Analysts predicted 211 thousand orders. The indicator could suggest an adjustment of the US economy or the beginning of this process. However, at the end of the week the March data were surprising. The economy created 303 thousand jobs in March, and the unemployment rate fell to 3.8%, compared to 3.9% registered in February. The number of jobs created is above the analysts’ projections of 200,000 new jobs. Unemployment is within the market projection.
This information reflects the surprising strength of the economy, with full employment maintained, labor market support, and high average wages. On the 10th, the March inflation and the consumer price index will be released. The CPI is accumulated at 3.2% in twelve months, against the Fed’s inflation target of 2%. Could inflation fall at full employment? This seems to be the Fed’s objective: to maintain full employment and bring inflation close to the target, at least.
The point is that this framework does not allow interest cuts in any assessment. The projection of the first interest rate cut for June is losing strength, and this can actually be left for the local pre-election period. The answer to this situation lies in the dollar. The dollar index rose again to the level of 105 points, showing the resumption of appreciation of the currency against others. Consequently, this situation has an influence on the value of the real, since Brazil is still an economy that is interconnected with the global framework.
The real broke the barrier of BRL 5.00/dollar initially due to this movement in the US currency abroad. However, there are serious internal factors. The obstacle involving Petrobras last week unblocked the payment of special dividends, in which the federal government must be the main beneficiary and will use this resource to reduce the hole in public accounts. This mechanism of uncontrolled spending and the incessant search for revenue growth will have a limit and should contain the economy’s pace. Furthermore, fuel prices are over 20% lower than in the international market. The release will generate higher inflation, and the containment clearly demonstrates government interference in the fuel market as an attempt to equalize the risks of inflation arising from the fiscal deficit. An equation difficult to solve without austerity in public accounts, but with inevitable consequences for inflation and exchange rate.
We had almost forgotten the required interventions by the Central Bank in the exchange rate to control the price of the currency. Last week, the Central Bank carried out a dollar swap again and was unable to promote a decline in the exchange rate. Is a race against the real starting due to the economic policy as a whole? So it seems, especially if the prime interest rates keep falling below global standards.
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