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Inflation Data, Expectations Both Bolster Case For 50BP Selic Rate Cut

BRAZIL
  • IBGE said the deflation in the month to mid-July was mainly driven by lower housing and food and beverage costs, whose declines were partially offset by an increase in transportation prices. With the annual reading now at 3.19%, officials will likely ponder a more aggressive start to the easing cycle, with a decision due next Wednesday.
  • Furthermore, the latest central bank survey showed reductions, albeit moderate, for inflation forecasts across all time horizons to year-end 2025, proving a re-anchoring of both short- and medium-term expectations.
  • The DI swaps curve has reacted accordingly on Tuesday, with swap rate contracts expiring in Jan-25 falling by as much as 13bps and the curve shifting lower by between 8-13bps.
  • For the currency, there has been some moderate downward pressure but as noted in our previous note from Commerzbank, USDBRL will continue to scan as an attractive short given the carry dynamics and the expected cautious approach to monetary easing from the central bank.
  • Outside of the Fed/ECB rate decisions this week, the domestic docket includes June current account data, outstanding loans and job creation & unemployment rate figures. Industrial production data is due early next week.
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