Inflation Surprises on the Downside in the US and Fed Keeps Rates Unchanged

With a full schedule of economic releases, the highlights of the week were the inflation results in Brazil and the US. While the IPCA increased as expected, in the US, the consumer and producer inflation results surprised on the downside. The Federal Open Market Committee (FOMC) monetary policy decision also took center stage. Rates were kept unchanged, but interest rate projections were revised upwards, indicating only one cut this year. Additionally, we published our revisions for the global and local macroeconomic outlook for June.

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The US Consumer Price Index (CPI) remained stable, varying by 0.01% in May, below market expectations (0.1%) after a 0.31% increase in April. Over 12 months, inflation slowed from 3.4% to 3.3%. The core indicator, which excludes more volatile contributions, stood at 0.16%, below April's reading (0.29%) and expectations (0.3%). Year-over-year, the core also decelerated to 3.4%. Still, the release is unlikely to provide the Fed with the confidence needed to begin a rate-cutting cycle.

The Federal Open Market Committee (FOMC) of the Federal Reserve kept the US interest rate unchanged for the seventh consecutive meeting, in line with expectations. Authorities once again revised upwards the interest rate and core inflation expectations for 2024 and 2025, indicating only one cut for this year (compared to three cuts projected in March). There was also an upward revision in the long-term rate, potentially reflecting expectations of a higher neutral interest rate.

At the post-meetingconference, Jerome Powell,the Fed's chairman,emphasized that May'sinflation reading was positiveafter a pause in this progressover recent months. However,he reiterated that more datais needed to be confident thatthis benign disinflation trendcontinues, which would givethe committee the necessaryconfidence to start cuttingrates. He also stated thatmonetary policy is restrictive,that the possibility of newhikes has not beeneliminated, but that itcurrently does not representthe base scenario of anycommittee member.

The US Producer PriceIndex (PPI) fell by 0.2% inMay, below April's 0.5%increase. Annually, theindicator rose by 2.2%.Excluding food andenergy, the indicator wasstable month-on-monthand decelerated slightlyyear-on-year. The readingscame below expectations,as did the Consumer PriceIndex (CPI) in May,indicating a more benigninflation reading,supporting the view ofroom for rate cutstowards the end of theyear.

The Broad National ConsumerPrice Index (IPCA) for Mayaccelerated to 0.46% in themonth, in line with ourprojection and above marketexpectations (0.42%). The 12-month accumulated rate was3.93%, above the 3.69%observed in the previousperiod. The reading showed aslightly worse opening, withunderlying servicesaccelerating again.Inparticular, labor-relatedservices did not improve onthe margin. This group isexpected to remain pressuredthroughout the year, reflectinga tight labor market.

In April, expanded retailsales fell by 1.0%on amonthly basis. Restrictedretail sales (excludingvehicles, motorcycles,parts, and constructionmaterials) rose by 0.9%.Of the 10 sectorsanalyzed, 7 grew and 2declined on the margin.The positive highlight washyper and supermarkets,while textiles, clothing,and footwear had thelargest contraction.Overall, retail sales wereweaker than expected,supporting our view ofsome moderation ineconomic activity in the2nd quarter of the year.

The volume of services inBrazil grew by 0.5%month-on-month in April,slightly above ourprojection (0.4%) andmarket expectations(0.2%). Year-on-year, thesector's increase was5.6%. Despite the positivemonthly variation inservices, it is worth notingthe decline in professionalservices and servicesprovided to families,which have a greaterweight in GDP, indicatingsome moderation ineconomic activity in the2nd quarter.

China's Consumer PriceIndex (CPI) rose by 0.3% inMay year-on-year,relatively in line withexpectations. The core CPI(excluding the mostvolatile items) increasedby 0.7% in the samecomparison. The ProducerPrice Index (PPI)continued to showdeflation (-1.4% year-on-year). Overall, the readingwas in line withexpectations, showing aless pronounced declinethan the previous month.

Amid rising inflationexpectations, resilienteconomic activity, anddomestic and externaluncertainties, we believethere is no more room forinterest rate cuts.Therefore, we revised ourprojections for theSelicrate from 10.25% to10.50% by the end of2024 and 2025. Wemaintain the IPCAprojection at 3.8% in2024, with upside risks infood (due to delays innatural shock reversalsand floods in the South)and services (tight labormarket). For 2025, theestimate remains at 3.7%,also with upside risks.

In the US, activity andinflation have slowed, butstill-high levels do not justifya rate cut much before theend of the year. Thus, wecontinue to expect only onecut in December this year.For Europe, we revised ourgrowth projections upwardsto 0.7% in 2024 and 1.0% in2025, amid stronger data.The ECB started the rate-cutting cycle and signaledcaution. We expect twomore cuts in 2024 and fourin 2025. For China, weexpect 5.0% growth in 2024,supported by manufacturingand exports.