Brazil: Focus on politics, with macro releases on the back burner – Rabobank

Brazilian assets had a positive last week on the back of local drivers, with a slight hand from some global developments, according to analysts at Rabobank.

Key Quotes

“Using market data by the time of writing (4:15pm BRT), country risk (5-year CDS) fell to the lowest level in almost two months (-16bps to 2228bps); the Ibovespa stock index outperformed (with a 2.6% jump); nominal yields bull-flattened (by 10-40bps across the curve); and BRL was the top performer among 35 of the major currencies (+2% to 3.78/USD).”

“Investors have recently started to price in slight more chances of passing key reforms in 2019, on the heels of recent political developments.”

“In terms of macro events, May IBC-Br confirmed an expected contraction in activity owing to the truckers’ strike. Although the early scraps of data continue to signal a rebound in June, which we see in line with a faster growth we still envision for 18H2, we revised down our full-2018 GDP projection to 1.3% from 1.6%.”

“Slow activity and tame expectations continue to support a constructive inflation environment, despite the risks of an FX pass through.”

“On the political front, as October general election draw near, it is time for party conventions and definitions of political alliances and tickets. The local media reports an agreement between a group of centrist parties with PSDB’s presidential candidate Geraldo Alckmin; agreements of other political groups are expected also to come out in the next few days.”

“This week’s macro calendar is relatively light, with June balance of payments (Thu) as the most important data release, in our view. The numbers are expected to underscore Brazil’s solid external position (at least for now), in stark contrast with a grim fiscal outlook.”