Brazil’s economy is slowing down again, with weak industrial production data released earlier this week.
As a result, investment firms are revising their forecasts for a rate hike.Brazil’s benchmark Selic rate is 7.25%, which is where it’s been since Oct. 10.
Barclays Capital said last month that inflation concerns would likely force the Central Bank to raise rates by at least 25 basis points early in the second quarter.
Twelve month rolling IPCA inflation in Brazil is around 6.45%. “Over the past six months, the GDP forecasts for every country have been getting revised downward, but not as much as they have been in Brazil,” said John Mullin, senior portfolio manager at Roosevelt Investments in New York.
Brazil started out 2013 with forecasts of 4% GDP growth. It’s now 3.1% as of Monday’s weekly Central Bank survey.
So even though the Central Banker, Alexandre Tombini, has said that he will throw the kitchen sink at inflation if he has to, slower growth is not going to prove popular.
Rising rates tend to slow growth as borrowing costs become more expensive and portfolio investors sell equities for higher yielding Brazilian government bonds.
There’s another problem with inflation and rate hikes: 2014 is an election year. The most recent data flow has not been kind to Brazil. Brazil IP data for February saw a 2.4% decline from January, weighed down by a 9% production drop in automotive, a sector that has been dependent on stimulus since 2008.
Other recent data does not help: recent retail sales confidence data from the Getulio Vargas Foundation has shown sequential year-over-year drops in March.
On Wednesday, the country’s Service Sector Purchasing Managers Index for March dropped to 50.3 from 54.5 in February.
Anything over 50 is considered a positive, but Brazil is running backwards at this point in the game. On a quarterly basis, most market analysts are maintaining their first quarter GDP forecasts of 1% (quarterly growth rate).
Much of this optimism is coming from expectations for a big contribution from agriculture, and not investment-led growth, which may last longer and boost the beleaguered industrial sector.
There is more downside in Brazil than upside at this moment, said Tony Volpon, head of emerging markets Americas for Nomura Securities in New York. Brazil has lost momentum. This makes a May rate hike a bit less likely that it did a month ago, Volpon said.
“We still think the Central Bank will hike rates in May, but worries about growth make it very likely we will see a very mild hiking cycle in a halting attempt to re-establish some control over inflation,” he said.
If the Central Bank decides not to act against inflation encroaching on 6.5%, it is likely that expectations for 2013′s average inflation rate will quickly move above 6% from around 5.5% today. This will set conditions for inflation to climb to the 6.5% region easily, or higher, in the 2014 election year.
Meanwhile, for equity investors, Brazil’s market is relatively inexpensive but its growth, risk, and sentiment/momentum indicators are poor, said Mullin.
Growth forecasts for 2013 have been slashed by 90 basis points during the past six months, declining global mineral prices have hurt the country’s terms-of-trade, the real exchange rate remains overvalued even at two to one, and equity price momentum has been a bore.
Even though the iShares MSCI Brazil (EWZ) exchange traded fund beat the MSCI Emerging Markets index in the first quarter, it is still down around 3.12% in 1Q.
Year-to-date, it is underperforming MSCI EM. And over the last year, Brazil is down 16.19% while the MSCI EM is down just 2.25%. Brazil has been, by far, the worst performing BRIC country over the last year.
forbes.com
As a result, investment firms are revising their forecasts for a rate hike.Brazil’s benchmark Selic rate is 7.25%, which is where it’s been since Oct. 10.
Barclays Capital said last month that inflation concerns would likely force the Central Bank to raise rates by at least 25 basis points early in the second quarter.
Twelve month rolling IPCA inflation in Brazil is around 6.45%. “Over the past six months, the GDP forecasts for every country have been getting revised downward, but not as much as they have been in Brazil,” said John Mullin, senior portfolio manager at Roosevelt Investments in New York.
Brazil started out 2013 with forecasts of 4% GDP growth. It’s now 3.1% as of Monday’s weekly Central Bank survey.
So even though the Central Banker, Alexandre Tombini, has said that he will throw the kitchen sink at inflation if he has to, slower growth is not going to prove popular.
Rising rates tend to slow growth as borrowing costs become more expensive and portfolio investors sell equities for higher yielding Brazilian government bonds.
There’s another problem with inflation and rate hikes: 2014 is an election year. The most recent data flow has not been kind to Brazil. Brazil IP data for February saw a 2.4% decline from January, weighed down by a 9% production drop in automotive, a sector that has been dependent on stimulus since 2008.
Other recent data does not help: recent retail sales confidence data from the Getulio Vargas Foundation has shown sequential year-over-year drops in March.
On Wednesday, the country’s Service Sector Purchasing Managers Index for March dropped to 50.3 from 54.5 in February.
Anything over 50 is considered a positive, but Brazil is running backwards at this point in the game. On a quarterly basis, most market analysts are maintaining their first quarter GDP forecasts of 1% (quarterly growth rate).
Much of this optimism is coming from expectations for a big contribution from agriculture, and not investment-led growth, which may last longer and boost the beleaguered industrial sector.
There is more downside in Brazil than upside at this moment, said Tony Volpon, head of emerging markets Americas for Nomura Securities in New York. Brazil has lost momentum. This makes a May rate hike a bit less likely that it did a month ago, Volpon said.
“We still think the Central Bank will hike rates in May, but worries about growth make it very likely we will see a very mild hiking cycle in a halting attempt to re-establish some control over inflation,” he said.
If the Central Bank decides not to act against inflation encroaching on 6.5%, it is likely that expectations for 2013′s average inflation rate will quickly move above 6% from around 5.5% today. This will set conditions for inflation to climb to the 6.5% region easily, or higher, in the 2014 election year.
Meanwhile, for equity investors, Brazil’s market is relatively inexpensive but its growth, risk, and sentiment/momentum indicators are poor, said Mullin.
Growth forecasts for 2013 have been slashed by 90 basis points during the past six months, declining global mineral prices have hurt the country’s terms-of-trade, the real exchange rate remains overvalued even at two to one, and equity price momentum has been a bore.
Even though the iShares MSCI Brazil (EWZ) exchange traded fund beat the MSCI Emerging Markets index in the first quarter, it is still down around 3.12% in 1Q.
Year-to-date, it is underperforming MSCI EM. And over the last year, Brazil is down 16.19% while the MSCI EM is down just 2.25%. Brazil has been, by far, the worst performing BRIC country over the last year.
forbes.com
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