US jobs data pressure Fed, but with little effect on Selic, analysts say

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The July data on the US labor market surprised the market and reinforced bets on a more aggressive rate hike cycle. For Brazil, however, experts estimate that the impact of this scenario tends to be small.

The Payroll report brought the unemployment rate down to 3.5%, with the creation of 528,000 jobs in the previous month, compared to the approximately 250,000 expected by the market. Investors’ reading was that the US economy remains heated, removing a view that the country would be entering recession sooner than expected.

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As a result, there would be room, and even a need, for the Federal Reserve to raise interest rates more than projected throughout July.

A survey by the CME Group points out that, seven days ago, the market gave a 34% chance of interest rates rising 0.75 percentage point in September and 66% increasing 0.5 pp This Friday (5th), the picture was reversed : 66.5% bet on the highest value, and 33.5% on the lowest.

Interest in Brazil

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A more aggressive bullish cycle by the Fed, with interest rates ending in a range of 3.75% to 4%, had already been priced by the Monetary Policy Committee (Copom) previously, and therefore has already entered the decisions for the Selic rate. , says CNN economics expert Sergio Vale.

The bet at this level already appeared as the most likely in June, and lost strength only in the following month, when the market welcomed the activity and GDP data that pointed to an earlier-than-expected recession.

Thus, the return of market position would not be exactly a novelty for Copom.

It is also worth mentioning that the greatest uncertainties for the committee are in the domestic market, with the elections, whose result may impact interest rate decisions more than the scenario in the United States.

The main reflection for Brazil of higher interest rates in the United States would be transmitted by the exchange rate, according to Étore Sanchez, chief economist at Ativa.

“It is natural that, with the strong job market, the Fed can raise interest rates more, and this attracts capital and the dollar appreciates against the real”, he says.

However, there is no way to guarantee that the exchange rate will follow this expectation of devaluation. This Friday, for example, the dollar fell against the real, even though it rose against a series of currencies from emerging countries, and Brazilian future interest rates did not bring expectations of a new high by the Copom.

Sanchez says that the labor data was a surprise, but “not to the point of changing what has been indicated” by the Brazilian monetary authority, especially considering the large current difference between Brazilian and US interest rates.

But if the Fed raises interest rates further and the dollar appreciates significantly against the real, the Copom may end up being forced to raise interest rates further to widen the spread between rates, says Nord Research founding partner Marilia Fontes.

“If the Fed has a scenario of strong activity and needs to raise interest rates a lot, it would attract investments, generating an exchange rate devaluation that affects inflation, with the need for the Central Bank to either raise the Selic more or leave it high for longer”, he says. .

On the other hand, Victor Candido, chief economist at RPS Capital, believes that a more aggressive Fed could end up helping the Copom.

According to him, higher interest rates in the country would tend to reduce inflation. “We import a lot of inflation, like food, those linked to commodities, if it goes down there, it tends to go down here too”, he explains.

He also says that a possible devaluation of the real would worsen the scenario for the Copom, but he believes that the Brazilian currency “is so depreciated that it cannot get much worse, it depends much more on the election”.

market reactions

But the Fed’s move will only take a concrete step in September, at the next monetary policy meeting. Until then, the market should continue to react to each data on the country’s economy in search of clues about the interest rate cycle.

The autarchy already signaled in August, after raising the rate by 0.75 pp for the second time, that the next increases will be determined meeting by meeting with the available data, opening for both milder increases and of the same magnitude.

The market’s logic has been to react positively to data that point to a weaker US economy, associated with a softer Fed stance, and negatively to stronger numbers, linked to the expectation of a more rigid stance against inflation.

Candido says that companies on the stock exchange tend to fall when the expectation of higher long interest rates gains strength, as many have high levels of debt and, therefore, would have more costs and lower profits.

There is also the dynamic between fixed income and variable income, according to Sanchez. With higher interest rates forecast, Treasury bonds gain strength against equities, which tend to fall. If the projection is for lower interest rates, the opposite occurs.

For the RPS economist, the market’s return to the expectation of a tougher Fed is “natural”, indicating that the “recession sentiment” already present in the market had to be revised. With a stronger labor market, wages and demand are likely to continue rising, pushing up inflation and demanding a tougher fight by the Fed.

“I think the market will still have this volatility. Each new piece of data is evaluated in a different way, and what happens there has repercussions here and around the world. It is a scenario of very high global uncertainty, and it is natural that each new relevant data moves the market”, he explains.

Even so, some data are more important than others. Sanchez recalls that the Fed’s “mandate” involves employment and inflation targets, not economic activity or GDP.

Therefore, numbers linked to the two points tend to have more relevance, and currently the unemployment rate is below what the Fed calculates to be the value of full employment, giving more room for maneuver for the municipality.

“When this strong number comes out, it ends up opening space. Employment does not make the Fed raise interest rates, but the fear with the activity becomes less, and then it opens space to play a role in the face of inflationary deviation”, he says.

Even so, he does not believe the municipality will raise interest rates again by 0.75 pp in September, with a rise of 0.5 pp, but that it will adopt a higher terminal rate, at 4%, a hypothesis also raised by Goldman Sachs in report.

“The inflationary deviation still persists, but this employment data is more related to the terminal rate than to the pace at which it will be reached”, he says.

For him, the next important data in the market will be the Consumer Price Index (CPI) for July, which will be released on August 10 and may bring as a surprise a more intense deceleration, reinforcing the perspective of a smaller monetary effort by the Fed. . If it comes as expected, maintaining the highest levels in 40 years, the bets of a tougher Fed should stand.

Fontes, from Nord, highlights that there is a dichotomy scenario in the US economy today. On the one hand, labor market data point to a strong economy, with falling unemployment and rising wages.

Technically, however, the country is in recession, with two consecutive declines in GDP.

“This is possible because it is a time of very high inflation. Inflation was so much higher that real GDP ended up being negative in those specific quarters, it ate into GDP. It’s not a recession that controls inflation, it’s just a technical thing,” she explains.

Vale, on the other hand, points out that the labor market did not show a real recession, but, combined with other data, “it is almost inevitable that it will occur”.

Source: CNN Brasil

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