Porto Alegre, February 28, 2023 –A tense Carnival week in the commodities environment, despite the Brazilian and US holidays. The excessive rains in parts of Brazil continue, and the planting of the second crop advances, maintaining the delay, which must have nearly half of the area expected to be planted in March. Besides the productivity curve, there is the natural risk condition of fall/winter with rainfall and frosts. Most crops will go into pollination and silking in May and June, bringing risks to production. In addition to this scenario, frosts in Argentina at a critical stage for crops bring another potential loss for corn and soybeans. Definitively, a historic crop failure of the Argentine crop creates an environment of greater sensitivity regarding the profile of the 2023 US crop of corn. With the planting intentions report scheduled for March 31, as usual, the US crop starts imposing its degree of interference in the formation of world prices and, with the arrival of El Nino, the chances of production losses seem smaller this year. Tensions in the Black Sea induced by the war and the Brazilian harvest are another set of information for prices. In general, the Brazilian domestic market continues to resist the bullish movement, with consumers trying to work with the lowest possible stocks and waiting for growers to continue choosing to sell corn and retain soybeans. However, the delayed planting of the corn second crop must prolong the off-season in the first half of the year, with the possibility of price highs.
The global financial market changed its course this February. From optimism at the turn of the year, it turned into a new cycle of concerns about the trajectory of global interest rates. The issue has been the sequence of US and European data released this month. January inflation without sharp cuts, higher-than-expected inflation index, January employment data very high, and economic growth slightly lower but still strong. Holding back inflation in a situation of full employment has been the challenge for the Fed, the US central bank.
In December, the 2023 bias indicated three interest rate hikes of 0.25%, putting the annual rate just above 5%. The symptoms of this first semester in the economy reveal that the Fed may have to exert a little more effort to bring inflation to the target of 2% a year more quickly. Today inflation is accumulated at 6.4% in twelve months. The resistance to falling inflation and the employment rate once again brought back the warnings that prices may take longer to fall with the current interest rate standard.
Then, the financial market resumed its bias towards higher interest rates. For the time being, a new high of 0.25% by the Fed is expected for March, but there is a current that believes that more accelerated highs are now more significant, by 0.5%, so that inflation can fall more quickly and the control of interest rates may also arise earlier. Higher interest rates for a longer period or sharper highs in the short term for future stabilization? This is the Fed’s new dilemma.
The impact of this market posture on interest rates is reflected in the exchange rate. The dollar index, which had settled down to 101 points, showing a devaluation of the dollar against other currencies, rose again to almost 105 points at the end of the week, showing a strong appreciation of the dollar. Stock markets are plummeting. These are symptoms that the market may be focusing on a recessionary process ahead, given the need for the Fed to resume escalating interest rates. Europe, with higher inflation, does not leave room for different conditions for local monetary policy.
Thus, the yuan, the Chinese currency, rapidly devalued again, to 7/dollar, revealing that the Chinese currency will act to maintain the competitiveness of its exports and avoid a more complicated scenario with a possible downturn in global trade. The real is still seen by banks and some financial institutions to have something positive in the current economic policy, ignoring the attacks made on an independent central bank, the spending ceiling, and inflation targets. The attempt to bring an artificial interest rate decline curve, at a time when the world economy continues to work with the inverse trajectory and Brazilian inflationary expectations rise every week, could be the trigger for the advance of capital flight in the Brazilian economy and a sharp rise in the exchange rate. Without the control of public spending, improvement in inflationary conditions, and observation of the global scenario, Brazil may be preparing a very pessimistic environment for its future indicators.
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