May 31, 2023

Ibovespa rises more than 4% and exceeds 106 thousand points after the IPCA: Why the inflation data stirred the market so much this Tuesday

After reaching around 100,000 points, is it time for Ibovespa to pick up momentum and move away from that level for good?

The Ibovespa index jumped 4.29%, to reach 106,213 points, on Tuesday (11), driven by a “bundle” of positive factors that also led to a significant drop in the dollar in the session. It is the largest percentage gain for the index in a single day since October 3, 2022, when it closed at 5.54% in the session after the first round of elections in the country.

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This morning, a positive surprise with the Extended Consumer Price Index (IPCA), which came in lower than expected, encouraged investors. In addition, indicating that the team of Finance Minister Fernando Haddad seeks to deliver the final proposal for the new fiscal rule to Congress this week and the letter that the minister himself sent to the International Monetary Fund (IMF). He contributed to the increase, as he committed himself to the responsibility of the expenses.

The inflation index rose 0.71% in March, after advancing 0.84% ​​in February, data released by IBGE showed this Tuesday. In 12 months, it has accumulated an increase of 4.65% versus 5.60% before, the variance was the lowest and represented the first time the index had fallen below 5% since January 2021. Both data were below expectations.

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The slowdown in inflation and the convergence of expectations, in addition to the news related to the fiscal framework (highlighting the Brazilian public accounts), will help to boost the Brazilian stock market, as it will open the way to the possibilities of an early cut in interest rates.

“IPCA’s lower-than-expected March index triggered a wave of optimism and a repricing of risk assets, with Ibovespa and real rising, while futures rates fell. The IPCA showed lower cores and opened a gap for Selic’s cut potential in June, at a time when the prevailing There is also optimism about the progress of the new fiscal framework proposal,” confirms Alexsandro Nishimura, Economist and Partner at Nomos.

It should be noted that in a report at the beginning of the month, XP raised its forecast for Ibovespa at the end of the year from 125 thousand points to 128 thousand points, one of which was the fixation of real interest rates in the long term.

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Thus, the relaxation in the Selic rate, currently at 13.75%, is seen as necessary for a more sustainable improvement in Brazilian equities, especially those sensitive to the domestic economy, as it reduces the attractiveness of fixed income and also improves the investment environment. Business and loan facilitation as well as strengthening the Brazilian economy. So far, Focus economists expect a drop in interest rates in the second half.

Pedro Cantu, an analyst at CM Capital, believes that both factors (slowing inflation and the fiscal framework, setting expectations) are very important. “There is less inflation on the horizon, with a likely lower Cilic rate. Opportunity cost goes down, risk goes down and risky assets go up,” he says.

It should be noted that Roberto Campos Neto, President of the Central Bank, recently indicated that it is expectations that lead to lower interest rates, and not directly the fiscal framework. Thus, investors are celebrating the IPCA slowdown, in a context where the government has pressured BC to cut the rate.

Today’s IPCA data brought important positive surprises to the Brazilian scenario. In addition to the surprise in the overall indicator, it is worth highlighting the substantial improvements in core inflation metrics, especially services and cores. The improvement is also seen in the seasonally adjusted data,” assesses Luca Mercadante, economist at Rio Bravo.

Despite the positive surprise, Mercadante still didn’t believe that one month could change Cobum’s attitude. “For interest rate cuts to emerge sooner than expected, we believe BC should see a more consistent process of easing inflation. One month alone should not be able to guarantee inflation consolidation. So we continue to see Cilic at 13% at the end of the year he says.

For Levante Ideias de Investimentos, analyzing the IPCA numbers will be “tough”, as investors look for direction.

Home analysts, citing analysis by IBGE, suggest that inflation has not slowed further due to the return of federal tax collection at the beginning of the month, which was put in place under Temporary Measure 1157/2023. PIS/COFINS are charged for fuel again starting March 1st.

However, “if we don’t think about the fuel, the other groups show that inflation is not quite as good,” their assessment is.

Following the transportation group, according to the IBGE, came the health and personal care groups, up 0.82%, and housing, up 0.57%. These two components, which are important in the price basket, slowed down compared to February, contributing respectively 0.11 and 0.09 percentage points to the index. The remainder was between 0.05 percent for food and beverages and 0.50 percent for communications. The only group whose prices fell were household goods, with a decline of 0.27% after rising 0.11% in February.

Explaining inflation will require a “philosophical effort” from investors. Pessimists will argue that a slowdown is not enough to justify a change in expectations for future interest rate behavior. Optimists will say that a pullback is enough to change the scenario. In practice, these doubts will only be resolved in the coming days, with the comments of the central bank managers and the approach of the next meeting of the Monetary Policy Committee (Copom), scheduled for May 2 and 3, “assess Levante. However, he confirms that the first reaction For investors on the IPCA less than consensus was positive, particularly considering the risky asset volatility scenario.

Leandro Petrokas, director of research and partner at Quantzed, an analysis house, technology company and investor education, points out that in addition to the IPCA, international stock markets are mostly on the rise today. “We also have investors who are bullish on improving the text on the financial framework and companies in the commodity sector are boosting Ibovespa upwards with increases in companies related to oil and mining,” he asserts.

Shares in Vale (VALE3) rose more than 5%, while Petrobras (PETR3; PETR4) shares rose 4.3% for ON shares and about 4.5% for PN shares. However, the highlights were airlines Gol (GOLL4) and Azul (AZUL4), which also benefited from a lower dollar, as well as retailers and builders who benefit from seeing lower interest rates.

Luiza magazine (MGLU3) was up nearly 13% and MRV (MRVE3) about 9%, while educational companies Cogna (COGN3) and Yduqs (YDUQ3) were up more than 10%. Only shares of Minerva (BEEF3) fell more than 1%, while units of Taisa (BEEF3) fell more than 1%.[ativo=TAEE1]) closed slightly lower by 0.03%, which are the only two declines in the Ibovespa index.

Data from B3 also shows the return of foreigners to the Brazilian stock exchange, with a positive balance of R$655.5 million in April until last Thursday, after sales exceeded purchases in February and March. In January, there was a net inflow of R$12.55 billion.

Overseas, Wall Street had no set direction among its main indexes, as investors await US consumer inflation data on Wednesday, which may determine the next monetary policy moves from the Federal Reserve. The Dow Jones was up 0.29%, the S&P 500 was neutral and the Nasdaq was down 0.43%.

(With information from Reuters)