After successive negative surprises with the Broad National Consumer Price Index (IPCA), the month of May did not confirm a worsening of inflation, but also did not confirm an improvement trend. The assessment is by Evandro Buccini, managing partner of Rio Bravo Investimentos.
When analyzing the advance of 0.47% of official inflation in May in the monthly comparison, Buccini says that the absolute number is not something to be “celebrated”, because it follows a high percentage. He draws attention to the fact that the month is naturally a period when structural inflation starts to slow down.
Still, he cites some positive highlights such as food, which increased 0.48% in May, compared to 2.06% in April. In addition, he says that the index was helped by some household items and the effect of the change in the energy flag, which returned to green about two months ago. In May, for example, residential electricity fell by 0.36 percentage points, according to the Brazilian Institute of Geography and Statistics (IBGE).
• IPCA slows to 0.47% in May, better than market expectations
On the other hand, gasoline continued to cause problems for the index, advancing 0.92% in May, in the opinion of the managing partner. While fuel has slowed from the previous month, fuel has helped cause other regulated price items to come in higher than expected.
Another point of attention is service inflation and core inflation – which serve to mitigate transitory impacts on price behavior – and which came in a little better than expected, but are still high. Services inflation, for example, ended May at 0.85%, in the monthly comparison, while the average of the cores ended at 0.92%.
“We are keeping an eye on it because it is an inflation that is difficult to overcome. If it stays high for a long time, along with a strong job market, it could lead to a Nairu employment scenario”, says the executive. In practice, this definition corresponds to an economic concept according to which, at a certain level, the labor market becomes a source of inflation.
The specialist, however, reinforces that, in May, services inflation did not show that it is “getting out of control”, unlike the previous month.
Also noteworthy is the diffusion index – which measures the percentage of items with price increases – which stood at 72% in May, which represents a slight decrease in relation to April. When looking at the number, Buccini said that the indicator remains high and with a more stable behavior, remaining above 70% since December 2021, which is also worrying.
Selic at 13.25% and Copom keeping doors open
With the numbers showing that it is still not possible to “snag” an improvement trend in inflation, Buccini says that, in his view, the IPCA confirmed that the Monetary Policy Committee (Copom) will have to raise interest rates by 0.50 percentage point at this month’s meeting, which would take the Selic to 13.25% per year.
“It follows the plan that they had to carry out one more hike and stop to observe”, he says. “The challenge will be to write this in a way that is believable and clear to the market.”
The executive says that, if the BC is vacant, the market may be without an anchor. Therefore, it will be very important to find the ideal tone so as not to cause major changes between the projections of financial agents.
“It seems to me that the yield curve is going the way it [BC] would you like. Can have one more high [depois de junho], but it is little. I think BC’s plan A is to stop to observe the delayed effects”, ponders the professional.
Amidst the imbroglios involving bills focused on reducing the price of fuel, Buccini says that the minutes should also provide more details about the BC’s concern regarding this issue. “There will have to be something about this, because it generates a lot of volatility for inflation”, he says.
When asked if such projects can postpone the Selic cut cycle next year, Buccini says that this is the big question of the moment. He highlights that the move that has been made by Congress and the Executive has great potential in terms of fiscal damage and that it is just “another example of the destruction of the spending ceiling”.
Looking at the numbers, Buccini says big houses project that such measures could take between 2 and 3 percentage points off this year’s inflation projections. However, next year, he says that this should return in the form of 1 percentage point more for inflation.
Such factors should put pressure on 2023 interest rates and make the BC have to postpone the start of the cuts cycle. For the Executive, the Selic should end next year closer to 10%, whereas before the house’s expectations were around 8%. Likewise, the house’s inflation projections for next year – which currently stand at 4.5% – should be revised upwards.
Possible readjustments in the price of gasoline and diesel are also on the executive’s radar. According to him, the current moment is favorable for gasoline to be higher in the northern hemisphere and this can also help to force prices up here in Brazil.
“Depending on what happens with the exchange rate and with oil, these ICMS reduction measures can be completely offset by the price of the commodity”, he warns.
Allocation in inflation bonds
When asked about the scenario he predicts for the yield curve, the Rio Bravo partner argued that most assets are in “a time of high volatility and not much trend”.
In this sense, the house did not make major recent changes to the portfolio and only continued with most of its allocation in multimarkets to inflation-linked government bonds (NTN-Bs) with a maturity of six years.
According to him, the manager has also adopted some tactical positions with an eye on the worsening of the slope of the curve (in which longer-term bonds offer more attractive interest rates because they are more susceptible to risk), despite noting that “it takes a stomach”, because these roles will remain very volatile.
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