Brazil: Eyeing the political scene and the BCB's inflation estimates – Rabobank

Analysts at Rabobank suggest that for this week, the highlight is the BCB’s 17Q3 inflation report (Thu), but the agenda also includes the IPCA-15 inflation preview for September (Thu) as far as Brazilian markets are concerned.

Key Quotes

“Mixed feelings for Brazilian assets last week: on one hand, the improved USD momentum helped drive the BRL 0.7% weaker, in line with peer-currencies. The local yield curve has steepened again, with slight upward pressures on the back end. Despite the return of politics to the forefront, after the PGR filed another change against president Temer, the Brazilian (5year) CDS spread has reached another multi-year low and the Ibovespa stock index set a new record. We still believe local asset markets underestimate the execution risks for the pension reform until 2019-2020. The latter is a necessary condition (the most important one) for the sustainability of government finances and the economic recovery.”

“Event-wise, the Copom minutes reaffirmed signals of a gradual end to the easing cycle, starting with a moderate reduction (to 75bps) in the speed of cut in next meeting. The IBC-Br grew 0.4% m-o-m in July, topping median economists forecast (+0.1%), consolidating a perception that the recession is ending. The PGR (Prosecutor’s Office) has filed a new charge against President Michel Temer, which could compress (even more) the calendar for congressional debate on the pension-system reform.”

“Brazilian markets will also pay close attention to the messages from this week FOMC meeting in the U.S.. In the realm of politics, the Supreme Court will decide on the validity of the new charge against Mr. Temer, and Congress might advance a bit more on the discussions related to the political reform.”