Porto Alegre, July 11, 2023 – Early July was marked by the return of good rains in the US Midwest, allowing for a better crop outlook, be it for recovery or maintenance of favorable conditions. However, crops of corn are still at the limit of ideal conditions and, as of this week, most of them will enter the pollination and silking phase, as well as the soybeans should start blossoming in the second half of July. Despite all the factors that have occurred so far, the local harvest is still fully open, and the next thirty days will be fundamental for defining production. In Brazil, the exchange rate and CBOT helped to slightly improve price conditions at the port and in export business.
The schedule of shipments in July is very good, and now this is a matter of waiting for the real numbers in view of the high export flow of all commodities. Meanwhile, the second crop harvest is progressing, and some expected regional situations are being confirmed, such as strong pressure from sorghum sales and lack of space in some warehouses in the Midwest region.
The main indices of the US stock market closed in negative field due to growing fears that the Federal Reserve (Fed, the US central bank) may resume raising interest rates after the June labor market report. The US economy added 209,000 jobs in June, and the unemployment rate dropped to 3.6%, against 3.7% in May. The number of vacancies created came below the projection of analysts, who expected 240,000 new jobs. The unemployment rate came in line with the forecast.
Despite the report showing that US job growth slowed more than expected in June after rising the previous month, job market conditions remain tight, and salary gains continue. This was after the stronger-than-expected private sector jobs report. Together, the data helped bolster bets that the Fed will raise interest rates again at its July 21 meeting.
After the release of the indicators, traders maintained their bets on the resumption of highs later this month, pricing in a 92% chance of an 0.25% hike at the end of the month. Monetary policymakers indicated at their June meeting that two more rate hikes might occur in 2023.
With this scenario, the dollar index was quite volatile last week, favoring some volatility for the real as well. Now, on the 12th, we will have the US inflation in June, today accumulated at 4% in twelve months. If the accumulation with June stays well below this level, the intentions of raising interest rates will be held back at the FED meeting on the 21st.
The real also showed strong volatility during the week, again testing the level of BRL 4.95/dollar. In addition to foreign exchange volatility, some relevant factors deserve attention. The first is the comments by the new head of monetary policy of Brazil’s Central Bank on the Copom minutes, which pointed to resistance to lowering interest rates due to the risk of inflation and the imbalance of public accounts. A director of the Central Bank needs to support Copom’s decisions. Then came the suggestion that the Brazilian prime interest rate could yield to the level of the inflation target, that is, if the target is 4.5% for inflation, the prime interest rate could be 4.5%. The comment was relevant for a future vision of monetary policy based on who may become the new president of the institution. Besides, the fiscal shock was approved in the first round in the Lower House, with a brutal increase in the Brazilian tax burden and the future commitment of the private sector. This will allow the government to spend more while the private sector will pay more taxes to sustain the public machine.
At the end of the week, the real settled down again after a strong adjustment of the dollar in the international environment. This week will have the US inflation as a major piece of information and then the Fed’s meeting on the 21st.
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