Future interest rates in Brazil spike after US employment data, but lose momentum and end in fall By Reuters

2023-10-06 21:50:33

© Reuters. Job vacancy announcement at a company in Arlington, USA 04/07/2023. REUTERS/Elizabeth Frantz/File Photo

By Fabricio de Castro

SÃO PAULO (Reuters) – Interest futures contract rates rose by more than 30 basis points this Friday in some maturities, following the release of positive data on the US labor market, but the movement lost strength as throughout the day and the Brazilian forward curve ended the session falling.

At the opening of business, investors’ expectations revolved around data from the payroll report, with job vacancies in the USA. Immediately after the announcement, which occurred at 9:30 am, Treasury yields rose sharply, driving up future interest rates around the world, including Brazil.

Behind the movement was the perception that, with the US economy resilient, generating jobs, the Federal Reserve is likely to tighten its interest rate policy to curb inflation.

The Labor Department reported that the U.S. economy added 336,000 nonfarm jobs in September. Economists consulted by Reuters predicted openings of 170,000 jobs — practically half of what was verified.

Additionally, August data was revised upward, showing 227,000 jobs created, rather than the 187,000 previously reported.

In Brazil, there was a sharp increase in DI rates (Interbank Deposits) after the release of the payroll. The contract rate for January 2026 increased by 32 basis points compared to the previous day’s adjustment, while the contract rate for January 2027 increased by 30 basis points.

At a later point in the session, however, Treasury yields slowed, which was also reflected in the loss of strength in future interest rates in Brazil.

“Whenever the payroll comes out, there is a very strong reaction at first and then some correction”, pointed out economist Rafael Pacheco, from Guide Investimentos. “The interest rate correction was more technical: rates have already risen too much recently, so the market understands that they don’t have much more room to rise now,” he added.

In fact, in recent weeks the Brazilian forward curve — in line with Treasuries — had been rising, amid the prospect that the Fed will keep interest rates high for longer in the US. This week, much of the increase was already in anticipation of payroll data.

“Here, our interest rates were already rising, in an escalation. And now it seems that it has reached a level that no longer makes any sense, given the disinflationary process we are going through”, said João Piccioni, analyst at Empiricus Research.

Thus, in the afternoon future rates migrated to negative in Brazil, even though Treasury yields remained positive.

At the end of the afternoon, the DI rate for January 2024 was 12.244%, equal to the previous adjustment, while the DI rate for January 2025 was 10.96%, compared to 10.981% of the previous adjustment. The rate for January 2026 was 10.84%, compared to 10.863%.

Among longer contracts, the rate for January 2027 was at 11.085%, up from 11.123%, while the rate for January 2028 was at 11.38%, up from 11.419%.

With this Friday’s movement, close to closing, the forward curve priced the chances of the Selic cut in November at 98% at 0.50 percentage points. The chances of a cut of just 0.25 percentage points — a possibility that emerged after the most recent rally — were priced at 2%.

In the morning, Fundação Getulio Vargas (FGV) reported that the General Price Index-Internal Availability (IGP-DI) increased 0.45% in September, accelerating compared to the increase of 0.05% in August and exceeding the survey’s expectations from Reuters, a gain of 0.31%.

Abroad, Treasury yields continued to rise in the late afternoon.

At 4:40 pm (Brasília time), the ten-year Treasury yield — a global reference for investment decisions — rose 6.80 basis points, to 4.7841%.