Long futures rates see a slight drop in a lower liquidity session and with the approval of the LOA By Reuters

2023-12-23 01:50:12

By Fabricio de Castro

SÃO PAULO (Reuters) – DI rates closed Friday close to stability at the short end of the term curve and with a slight drop at the long end, in a session marked by reduced liquidity before the Christmas period, due to the approval of the State Budget Union for 2024 in Congress and new inflation data in the US, which corroborated bets that the Federal Reserve could start the interest rate cut process as early as March 2024.

In the morning, ten-year US bond yields hovered in negative territory, with investors awaiting the release of the US PCE inflation index at 10:30 am. With the negative bias, DI rates (Interbank Deposits) also fell in Brazil.

The U.S. Commerce Department reported that the PCE price index fell 0.1% last month after being unchanged in October. In the 12 months up to November, the indicator increased by 2.6%, after rising 2.9% in October.

Excluding volatile food and energy components, PCE increased 0.1% in November. The so-called core PCE advanced 3.2% year-on-year in November, after rising 3.4% in October.

The Federal Reserve tracks PCE measures for its 2% inflation target. Economists consulted by Reuters predicted that the annual index would rise 2.8% and that the core would increase 3.3%.

“We saw again in the PCE a confirmation of the disinflationary trend abroad. This favored projections of interest rate cuts in the US”, commented Eduardo Moutinho, market analyst at Ebury.

However, as PCE data came in very close to expectations, ten-year bond yields turned positive, with investors also taking advantage of the day to close positions before the last week of the year – when global liquidity tends to decline even further. more.

In Brazil, rates also reduced losses and approached stability during the afternoon, especially on the short end, with professionals who were still at the trading desks paying attention to politics in Brasília.

In the middle of the afternoon, the National Congress approved the 2024 Annual Budget Law (LOA) project, after an agreement allowed a smaller cut in the amount allocated to the Growth Acceleration Program (PAC).

When voting on the text, which now goes to presidential sanction, parliamentarians tried to reduce the value of the electoral fund, but there was no support and the amount transferred will remain at 4.9 billion reais.

The approved project maintained the target of zero primary result in 2024. The objective is still viewed with skepticism by market agents, but its maintenance in the LOA is something positive, in the view of analysts.

At the end of the afternoon, the DI rate for January 2025 was at 10.05%, compared to 10.063% of the previous adjustment, while the DI rate for January 2026 was at 9.61%, compared to 9.606% of the previous adjustment. The rate for January 2027 was 9.7%, compared to 9.703%.

Among longer contracts, the rate for January 2028 was 9.92%, compared to 9.938%. The contract for January 2031 was 10.27%, compared to 10.314%.

Close to closing, the forward curve priced in a 98% chance that the Selic base rate cut in January would be 0.50 percentage points, as the BC has been signaling. The chances of a 0.75 percentage point cut were at 2%. Currently, Selic is at 11.75% per year.