Less inflation, low risks
Inflation is going through a soft patch in developed markets, and will likely become mixed in China. With slower reflation, the pressure on global interest rates is still modest;
Global growth is holding up in 2Q17, with activity recovering in the U.S., solid in Europe, improving in Japan, and moderating only gradually in China;
Political risks remain a worry both in DM and EM, but in Europe, risks have become more symmetric;
Despite the high level of global political uncertainty, steady growth, modest private-sector leverage and a still-easy monetary policy stance sustain a low VIX (an index of volatility of the U.S. S&P stock market index) in the U.S. And this environment supports the appetite for EM assets.
A setback for reforms and a more challenging scenario
A more turbulent political scene tends to delay reforms in Congress, making fiscal rebalancing more difficult and, consequently, affecting confidence levels and asset prices;
We now anticipate a weaker exchange rate, at 3.50 reais per U.S. dollar in 2017 and 3.60 in 2018;
We revised our forecast for the IPCA consumer price index downward for 2017 to 3.7% from 3.9%, but raised our call for 2018 to 4.1%, from 3.8%, due to exchange-rate depreciation;
We maintained our estimate for the benchmark interest rate by YE17 at 8.0%. We expect the pace of rate cuts to slow down to 75 bps in the July meeting;
A complex scenario, more uncertainties surrounding reforms and a milder decline in interest rates outline a challenging situation and should weigh on economic activity. We thus reduced our estimates for GDP growth to 0.3% this year and 2.7% in 2018.