Inflation in the spotlight

The main highlight of the week on investors' agenda was the February inflation results around the world. In China, the indicator returned to positive territory, while the reading came in above expectations in Brazil. In the USA, in addition to the strong reading, core measures remained under pressure.
Later this week, we released our review of the Brazilian and global scenario, considering the postponed monetary easing in the United States and the Euro Zone.
Now, attention turns to Super Wednesday, which takes place next week, when the US and Brazilian monetary policy decisions will be announced.

Check out more details:

We raised GDP projections to 2.0% for 2024 and 2025, incorporating a better outlook for credit. We estimate the unemployment rate at 7.8% in 2024 and 2025. Improved activity marginally reduces the primary deficit (we now project 0.7% of GDP in 2024 and 0.9% in 2025) but fiscal uncertainties remain high. We maintained the IPCA estimate for 2024 (3.6%) and for 2025 (3.5%), but with a less benign composition. We expect the Selic rate to end the year at 9.25% (previously 9.00%) and to remain at this level in 2025.

In the US, stronger employment and inflation data in January, which led the Fed to adopt a more cautious tone, indicate the first cut in June, a gradual pace, and a higher terminal rate (between 3.75% and 4%). In Europe, persistent inflation justifies the central bank's caution. We now expect the start of the interest rate cut cycle in June. In China, we maintain a GDP projection of 4.7% in 2024 with greater fiscal support, but the effectiveness of the stimuli is still uncertain.

China's Consumer Price Index (CPI) rose 0.7% in February on an annual basis, after contracting in January, and above market expectations amid strong activity during the Lunar New Year, which impacted both food and services. Meanwhile, the Producer Price Index (PPI) continued in annual deflation, a deeper drop than the previous reading and expectations. We expect consumer inflation to remain in positive territory, albeit at low levels, and PPI deflation to continue.

Brazil's IPCA for February rose 0.83% for the month, slightly above market expectations, but concentrated in items not part of the core inflation (such as food and administered prices). The 12- month cumulative reached 4.5%, the same pace observed in January. The quality of this release was better than expected, with a bearish surprise in underlying industrial and underlying services.

The volume of sales in the Brazilian broad retail trade expanded by 2.4% in January compared to the previous month, exceeding market projections. In the restricted concept, sales rose 2.5% for the month, also surpassing expectations. On an annual basis, the increase was 4.1%. Generally, income-sensitive segments, such as hyper and supermarkets, brought surprisingly positive results, in line with solid labor market outcomes and creating a positive bias for 1Q24 GDP.

Brazil's service volume showed a monthly growth of 0.7% in January, marking the third consecutive positive result. The reading was much stronger than projected by the market, which expected a contraction of the indicator. On an annual basis, the increase was 4.5%, the most intense advance since May 2023. The performance was driven by transportation and communication. The results of services and retail sales corroborate a stronger GDP for 1Q24.

The UK's GDP showed an improvement of 0.2% in January on a monthly comparison, after a decline in the previous reading. The increase was slightly above market expectations. The positive highlight was the acceleration of the construction sector and services, while industrial production recorded a contraction. Despite the positive growth for the month, the release does not change the scenario of economic activity stagnation in the region, which ended 2023 in a technical recession, after two consecutive quarterly contractions.

The Eurozone's industrial production recorded a decline of 3.2% in January, compared to the previous month. The contraction was also more intense than the one registered in December, at 2.6% after revision. The reading was well below market expectations, which pointed to a less deep fall. The weakness of the industry was general for all Eurozone countries, but exacerbated by the drop in Ireland.

US retail sales advanced 0.6% in February, below market expectations. However, the highlight was the revisions applied to the series, which brought the values for December and January down, for example. The positive reading for the month, as well as the 1.5% growth on an annual comparison, reinforces the picture of resilient activity in the country. Still, the downward revisions for the past months highlight signs of moderation in consumption, after a strong second half of last year.

The US Consumer Price Index (CPI) rose 0.4% in February, in line with expectations, but slightly above the January figure. On a 12-month basis, inflation accelerated to 3.2%, slightly above expectations and the previous reading. The composition shows service prices as the most persistent factor of inflation, while the core goods continue to contribute negatively. In addition to a strong reading, core measures remain pressured at the margin and still distant from the 2% target over 12 months.