Copom toughens the tone in its monetary policy minutes​

The minutes of the last Copom meeting were a highlight on investors' agendas this week. The document, with more details about the non-unanimous decision to cut interest rates to 10.50%, had a tough tone and, in our view, opened the door to the end of the cutting cycle.

In the US, the Consumer Price Index (CPI) for April came in relatively in line with expectations, with core measures slowing but still at a high level.

We also published our monthly macroeconomic scenario review, both locally and internationally.

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In March, the real revenue of the services sector (PMS) advanced 0.4% on a monthly comparison, close to our projection (0.3%) and above market expectations (0.2%). Overall, the sector grew 0.5% in 1Q24 (compared to the same period last year), driven by "Services provided to families," which expanded 1.3%. This supports our view that consumption sustained an important part of growth in the first three months of the year. For April, we expect some return for the "Services provided to families".

The government announced the departure of Jean Paul Prates from Petrobras. The CEO will be replaced by Magda Chambriard, who was director-general of the National Agency of Petroleum, Natural Gas, and Biofuels (ANP) from 2012 to 2016 and worked at Petrobras for over 22 years. Currently, she is a consultant in the oil, gas, and biofuels sector, director of fiscal advisory at the Legislative Assembly of Rio (Alerj), and partner at Chambriard Engineering and Energy. The market will monitor possible changes in the board, in addition to the government's expectations for the new management, especially regarding investment plans and the payment of extraordinary dividends.

The minutes of the last meeting of the Central Bank's Monetary Policy Committee (Copom), when there was a divided decision for a 25 basis points cut, had a very tough tone and opened the door to the end of the easing cycle. The document showed that domestic and international conditions should remain uncertain, requiring greater caution in conducting monetary policy. The minutes indicated that there was disagreement only about the pace of cuts, but no divergences in the general diagnosis and in adopting a more contractionary policy amid the uncertainties in the scenario, without indications about the next steps.

We revised our 2024 IPCA projection upwards to 3.8%, incorporating higher prices for food and industrial goods during the year. For 2025, we revised the projection to 3.7%, incorporating the exchange rate effect on industrial goods. The challenging global scenario and domestic uncertainties led the Central Bank to slow the pace of cuts. We assess that the room for further cuts is more limited. We raised the projection for the Selic rate, which we now expect to end the year at 10.25% per annum, remaining at this level until the end of 2025.

Strong growth in the US and persistent inflation should make it difficult to cut interest rates. We expect the start of the cycle only in December, but the risks are asymmetrical, pointing to no cuts in 2024. In Europe, the first cut should come in June, but the global scenario limits the room for reduction, while improved activity eliminates the urgency for consecutive cuts. For 2025, we project four cuts, bringing interest rates to 2.25%. As for China, we raised our growth forecast to 5.0% in 2024, still with significant momentum from manufacturing and infrastructure.

The Consumer Price Index (CPI) in the US rose 0.3% in April, slightly below the market projection, which expected a continuation of the March pace (0.4%). In 12 months, inflation slowed to 3.4%, in line with expectations. The core indicator, which excludes more volatile items like food and energy, slowed on both a monthly and annual basis but remains at a high level. The composition shows service prices as the most persistent factor in inflation, but slowing down, while the core of goods continues to contribute negatively to the indicator.

Industrial production in the US slowed in April to 0% on a monthly comparison, as reported by the Federal Reserve (Fed). The result was slightly below market expectations and combined with a downward revision of the previous month's reading to 0.1%. Overall, the indicator continues to signal a still fragile industrial activity, especially in the manufacturing sector.

Chinese authorities announced a national program to release 300 billion yuan in loan funds to 21 banks at a rate of 1.75%. According to the Chinese central bank, this would translate into an estimated 500 billion yuan (0.4% of GDP) in credit for home purchases aimed at reducing inventories. Additionally, there was an announcement of the removal of mortgage rate floors and reduction of minimum down payment rates for home purchases. Despite the importance of these measures to help stabilize the sector, we believe they are not sufficient to clear unsold property inventories.

The National Bureau of Statistics (NBS) released China's activity data for April. Overall, the data were mixed. Industrial production accelerated in April, driven especially by manufacturing. On the other hand, domestic demand and the real estate sector remained weak. The overall picture is still compatible with GDP growth within the government's target, given that stronger manufacturing and infrastructure should compensate for the weakness in the real estate sector and domestic demand.