FX Weekly Summary (Brazil Issue)

The USDBRL depreciated for the third week to close Friday's session (27) at BRL 4.738, a drop of 2.7% in the week, 4.1% in the month and 15.0% in the year. The dollar index extended its depreciation trend and ended Friday's session quoted at 101.7 points, a variation of -1.4% in the week, -1.2% in the month, but still gaining 6.4% in the year. Last week was marked by the recovery of international investors' risk appetite, who continued to sell dollar-denominated positions and invest in European assets, stock indexes, commodities and currencies of emerging economies. In Brazil, political topics dominated the news after President Jair Bolsonaro (PL) replaced, once again, the president of Petrobras and the Chamber of Deputies approved a bill that limits to 17% the Tax on the Movement of Goods and Services (ICMS) on fuels, electricity, public transportation, and telecommunications.

Foreign Scenario

This week the spotlight should be on labor market conditions in the United States amid concerns over a slowdown in economic activity in the country. The May ISM Purchasing Managers' Indexes (PMI) for manufacturing and services should moderate their expansion rates, in line with other high-frequency indicators of business activity. The May Employment Situation Report should also indicate lower net job creation than in previous months and likely stabilize the unemployment rate, currently at 3.6% of the labor force. The average income per worked hour should cool slightly, from 5.5% in April to 5.2% in May. In any case, this moderation in the indicators should be mild and not cause excessive concerns about stagnation... yet. Some recent indicators for production and demand have surprised negatively.
This week will also be the last for Federal Reserve officials before the mandatory quiet period required for the June 14 and 15 Federal Open Market Committee (FOMC) meeting. This week, the minutes of the May 4 FOMC monetary policy decision indicated that its members supported two more 0.50 percentage point interest rate hikes in the next two meetings and suggested that at that point, a reassessment of the economic environment would be appropriate to decide the best path for ongoing financial tightening. Speakers this week include New York Fed President John Williams, St. Louis Fed President James Bullard, and Cleveland Fed President Loretta Mester.
Unfortunately, the war between Russia and Ukraine presented major developments that caused concern last week. The Ukrainian Defense Ministry calls this the "maximum intensity" phase in the war so far, with the Russian army gaining a lot of ground in the Donbas region, particularly in the area consisting of the cities of Lyman, Serevodonetsk, Popasna, and Lysychansk. In addition, on May 24, the Ukrainian General Staff warned that Moscow had deployed Iskander-M missile launchers, which can carry traditional and nuclear cargo to the Brest region on the Poland-Belarus border. These ballistic missiles have a (short) range of between 400 and 500 kilometers, which puts the entire central and northern Ukraine in danger, depending on where they are positioned. The conflict seems destined for a long protracted war, with increasing threats of Russia's use of military weaponry and no near end in sight.
Finally, it is worth noting that an analysis by Nomura bank on May 23 estimated that 26 Chinese cities are in partial or total lockdown, affecting 208 million people. The analysis highlights the first week with a large drop in the number of people in lockdown (-25%). However, this still corresponds to approximately 14.8% of the Chinese population and 20.5% of China's Gross Domestic Product. In Shanghai, the restrictions are slowly being reduced; however, approximately one million residents (out of 25 million) are still confined to their homes. The municipal authorities have promised to open the city by June 1, but it is unclear how open it will be as some cases have been reported again. Beijing's capital is moving in the opposite direction, with an increase in restrictions, but still without full lockdown status. Districts are administering the measures, and only essential sectors operate freely.

Domestic Scenario

This week, the focus should be on the release of the Gross Domestic Product (GDP) for the first quarter of 2022 by the Brazilian Institute of Geography and Statistics (IBGE) on Thursday (02). High-frequency indicators of economic activity, such as industrial production volume, services and retail sales, showed growth in February and March, so there is an expectation of around 1.0% growth for the quarterly GDP. However, in case of surprise - positive or negative - investors may react and oscillate their investment levels for the country.
In addition, this week will bring other important gauges for the Brazilian economic situation. On Tuesday (31st), the IBGE will publish labor market data for April, including the unemployment rate and the average labor income, important references for the demand capacity. Furthermore, the General Price Index - Market (IGP-M) and the Consumer Price Index calculated by FIPE (IPC-Fipe), both for May, will be updated, allowing a more recent reading about inflationary pressures in the domestic scenario. Finally, S&P Global will release the Purchasing Managers' Index (PMI) for industry, services, and consolidated. In general, there is an expectation of cooling for these indicators.
It will also be important to note the news that the federal government's economic team intends to send a decree to Congress stipulating a cut in the 2022 Budget to request a 5% linear salary readjustment for all federal servers. According to press reports, the Planalto Palace will reduce BRL 14 billion in the education, health, and defense budget to finance the salary increase for federal employees and accommodate the increase in other mandatory expenses. Although promised in March by President Bolsonaro, the adjustment to the public servants has not been formalized yet. Employees of the Central Bank and the National Treasury are on strike, searching for improvements in their working conditions.
Finally, it is worth noting that this week the Chamber of Deputies approved a bill that classifies fuel, natural gas, electricity, communications, and public transportation as "essential and indispensable sectors," limiting the ICMS rate - a state tax - to a maximum of 17%. The text also establishes that there will be, until December 31 of this year, compensation paid by the federal government to the states for the loss of revenue through discounts in installments of debts refinanced by the entities together with the Union. Now, the president of the Federal Senate, Rodrigo Pacheco (PSD-MG), will discuss with the bench leaders if the project will be discussed in the standing committees of the House or will be voted directly in Plenary. Congress had already approved another bill changing the ICMS rate on fuels to fixed values in March this year.