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JPMorgan Say Receiving Front-End Of Curve Highest Conviction Trade

BRAZIL
  • JPMorgan’s highest conviction trade remains receiving the front-end of the curve. With their estimates expecting inflation to touch lows of 2.6% by 2Q23, (5.16% by y/e), market pricing of only 100bp cuts within the next two years seems shy, especially with significant cuts in the rest of EM.
  • Such a path would imply real rates close to double digits and moreover, BCB would have more flexibility to ease monetary conditions amid broader global policy normalisation. Looking at 2015, BCB kept rates unchanged at the peak for more than a year, but once it started easing, it delivered 775bp of cuts in the following 18 months.
  • As such, JPM think there is space for the curve to price more cuts as long as further political shocks are contained, and they hold DI Jan 26 receivers (entry level: 11.67%, target: 11.00%, review point: 14.25%, last: 12.70%).
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