By: StoneX Intelligence Brazil, StoneX Intelligence Brazil
Powell stressed that the Federal Reserve must maintain tight monetary tightening to control inflation and keep interest rates high until they are sure it has succeeded, raising expectations for dollar-denominated bond yields and would attract investments into that currency.
Water and energy crises in Europe could cause stagflation in the continent, creating an environment of risk aversion and search for safe-haven assets, especially the dollar.
High geopolitical tensions between China, the United States and Taiwan and the Zaporijia nuclear power plant in Ukraine may trigger unanticipated adverse events that would provoke risk aversion and the search for safe-haven assets.
Commodities, in general, remain high-priced due to weather events around the world, attracting significant inflows of foreign funds to the country and contributing to the strengthening of the Brazilian real.
Better than expected readings for economic indicators in Brazil may improve the appetite for Brazilian assets and reinforce the inflow of foreign capital into the country, contributing to strengthening the real.
Lower-than-expected readings for economic indicators in the United States may reinforce the interpretation that the country is going through a slowdown and that the Fed does not need to raise interest rates so much, favoring risky assets.
The USDBRL ended Friday’s session (26) quoted at R$ 5.079, down by 1.7% in the week, 1.8% in the month and 8.9% in the year. The dollar index closed the day quoted at 108.8 points, a variation of +0.6% in the week, +2.8% in the month and +13.8% in the year. The week was marked by the expectations surrounding Federal Reserve Chairman Jerome Powell's speech and how tight the Fed's monetary tightening would be after previous lower-than-expected manufacturing data. In the end, Powell delivered a tough speech in which he warned of more interest rate increases
Foreign Scenario
This week, the focus should be the release of economic indicators for the United States. The expectations of financial agents are more cautious and with a lower appetite for risk after a tough speech by the president of the Federal Reserve, Jerome Powell, indicated that the American central bank should be aggressive in raising interest rates and avoid a premature moderation in its monetary tightening until it consistently regains price stability. Powell indicated that the Fed would be willing to tolerate an economic recession to that end.
The ISM Purchasing Managers' Index (PMI) for manufacturing for August will be released. The preview released by another institution, S&P Global, revealed a weakening of the American economy in this period. However, the drop was more pronounced in the service sector and softer in industry. Thus, the outlook is for a slowdown in the pace of increase, from 52.8 points in July to 52.0 points in August. Another highlight will be the labor market, with the publication of the job openings and turnovers survey for July, the private sector employment report for August, and the employment situation report for August. The expectation is that the unemployment rate will remain stable at 3.5% and that the month will have created a positive balance of 285,000 new jobs.
In Europe, the Consumer Price Index (CPI) forecasts amid a severe energy crisis on the continent are worth mentioning. The average electricity prices in Europe are seven times higher than those in the United States. As some European governments are implementing subsidies and caps on electricity tariffs at this time, the tendency is for prices to increase in August at a slower rate when compared to July. Thus, the outlook is for a slowdown in the pace of increase, from 52.8 points in July to 52.0 points in August. Business conditions are expected to deteriorate rapidly, causing stagflation, i.e., a deep drop in production activity and consumer demand along with rapid inflationary acceleration. The situation is further aggravated by the intense drought on the continent, which affects the capacity to produce hydroelectric power, nuclear energy, and river cargo transportation. Most analysts expect the euro to remain weaker than the dollar while this unfavorable situation lasts.
And in the war between Russia and Ukraine, territory lines have remained virtually unchanged for weeks, with defensive positions and artillery exchanges between the parties predominating. The event of greatest note was the partial shutdown of the Zaporijia nuclear power plant for a few hours, forcing it to operate with diesel-powered backup generators. The risk of a cooling system accident is extremely high during an electrical failure. Russia has claimed that an attack on the power transmission lines caused this disconnection but has not been able to provide evidence of this attack. However, contrary to the majority expectation, the plant has been reconnected to the Ukrainian power system, not the Russian system.
Domestic Scenario
This week will bring several indicators that will allow for a more up-to-date reading of the current situation in Brazil. The most important of these will be the Gross Domestic Product (GDP) variation for the second quarter of 2022. If in the first quarter the sectorial indicators were almost all positive, the scenario for the period between April and June combines positive and negative factors. On the one hand, the unemployment rate continues to drop, and average labor income is also slowly recovering, with signs of more heated demand, such as fuel consumption at the highest level in the historical series and electricity consumption above the pre-pandemic level. But, on the other hand, industry and retail are coming from poor results, and service growth is slowing down. Thus, it seems unlikely that the GDP will repeat the 1.0% growth of the first quarter and should register a growth of a few tenths.
In addition, this week, two price indexes will be released for August. First, the median of the estimates for the General Price Index - Market (IGP-M) should point to deflation of -0.54%, a result of the drop in fuel prices and the moderate rise in other commodities. On the other hand, the Fipe's Consumer Price Index (IPC-Fipe) is expected to increase by 0.12% due to its greater sensitivity to food and beverage prices.
It will also be important to note the release of the National Survey by Monthly Household Sampling of the Brazilian Institute of Geography and Statistics (IBGE) with updated data for the labor market in July. The unemployment rate is expected to fall to 9.1%, and the average real income from the main job continues to rise. However, the characteristic of greater informality of the jobs created should also remain.
Finally, it is worth mentioning that the presidential race is more heated than ever after the beginning of the electoral campaigns and the long sabbaticals conducted by the TV news program Jornal Nacional with the candidates best placed in the current polls. This Thursday (1), a new poll will be published by the Datafolha institute, almost one month before the election. Of the three surveys that are conducted in person, this one stands out for the size of its sample (5,734 people), more than double the other two - Ipec (2000) and Quaest (2000) - and, for this reason, is widely followed by politicians. The first debate between the presidential candidates happened last Saturday. However, it was uncertain whether it would occur because neither Lula nor Bolsonaro - the two best-placed - had confirmed their presence as of Friday (26).
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