Market rises interest rates with expectation of approval of PEC Kamikaze

The expectation that the government will raise social spending outside the ceiling, with the approval by Congress of the so-called PEC Kamikaze, is making investors charge more in negotiations with public bonds.

The text, which would open the taps of public coffers for social programs 100 days before the elections, has an estimated cost of R$ 38.75 billion. As a result, futures interest rate contracts, which embody the expectations of market agents regarding the conduct of fiscal policy, have registered a strong increase throughout the month of June.

The contract rate for January 2023, which was trading at 13.38% at the close of May, was around 13.76% this Thursday (30).

Part of this movement is due to the external environment, with the Fed (Federal Reserve, US Central Bank) raising the US interest rate by 0.75 percentage point, says Luciano Rostagno, chief strategist at Banco Mizuho for Latin America.

But, according to him, the domestic scenario of more public spending increases the bets that the Brazilian Central Bank will have to extend the cycle of high interest rates to contain inflation.

“The discussion did not bring any news regarding what had already been leaked by the press, with the volume of extra-ceiling expenses being around R$ 39 billion. What the market fears, however, is not the expected impact, but understanding the how much ‘the door was left open’ for extensions or even additional increases in spending later on, especially taking into account that we will have elections at the end of the year, a fact that should start to govern market sentiments from the parliamentary recess in the middle of this year “, says Victor Beyruti Guglielmi, economist at Guide Investimentos.

“The risk to be monitored is the elevation of this account and the possibility that part of it becomes permanent”, endorse XP analysts.

In addition to the rise in future interest rates, Mizuho’s Rostagno also highlights the strong rise recorded by the dollar in June, close to 10%, heading for the biggest increase since March 2020, when financial markets around the world were shaken by the initial shock of Covid-19.

Global risk overlaps domestic risk on Thursday

The chief strategist also says that, although the fiscal risk remains very present on the investors’ radar, the market movements this Thursday have as main beacons the external environment, with significant drops in the main global stock exchanges, amid the growing risk in the eyes of agents on the weakening of the economy on a global scale.

In the United States, the S&P 500 index operated at a low of 0.8%, while the American yield curve also fluctuated downwards, influenced by the downward movement of interest rates in Brazil —​​the DI contract for 2023 dropped from 13, 79% to 13.76%. “The external is overlapping the domestic”, says Rostagno.

US market data on Thursday showed US consumer spending rose less than expected in May, with rising interest rates and tighter financial conditions fueling fears of a recession in the world’s biggest economy.

Consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.2% last month, the US Commerce Department said on Thursday, the smallest gain in five months. Economists polled by Reuters were projecting a 0.4% rise in spending. In addition, the April data was revised to show an increase of 0.6%, instead of 0.9% as previously reported.

In this scenario, asset manager PIMCO assesses that a recession in the United States is more likely in the next 12 months than a scenario without recession.

According to PIMCO’s global director of fixed income investments, Andrew Balls, the probability of a recession is around 50% or a little higher.

“A recession is not the only important thing. You will clearly see a significant slowdown in growth,” Balls said. The probability of a recession is similar in Europe, possibly slightly higher, he added.

with Reuters