BRAZIL: Brazil Based Financial Market Infrastructure Firm, Launch New Contracts

The May FOMC meeting minutes (link) suggested an upward reassessment to the inflation outlook with downside for growth, which is likely to manifest in June's Summary of Economic Projections, largely on account of the impact of tariffs since the March meeting. The new staff projections may already have been made obsolete by post-meeting developments such as the US-China de-escalation, but as noted in the minutes among FOMC members: "Overall, participants judged that downside risks to employment and economic activity and upside risks to inflation had risen, primarily reflecting the potential effects of tariff increases" meaning the FOMC "might face difficult tradeoffs if inflation proves to be more persistent while the outlooks for growth and employment weaken".

• On growth, "the staff projection for real GDP growth in 2025 and 2026 was weaker than the one prepared for the March meeting, as announced trade policies implied a larger drag on real activity relative to the policies that the staff had assumed in their previous forecast. Trade policies were also expected to lead to slower productivity growth and therefore to reduce potential GDP growth over the next few years. With the drag on demand expected to start earlier and to be larger than the supply response, the output gap was projected to widen significantly over the forecast period. The labor market was expected to weaken substantially, with the unemployment rate forecast moving above the staff's estimate of its natural rate by the end of this year and remaining above the natural rate through 2027."
• On inflation, "The staff's inflation projection was higher than the one prepared for the March meeting. Tariffs were expected to boost inflation markedly this year and to provide a smaller boost in 2026; after that, inflation was projected to decline to 2 percent by 2027."
• Notably, on risks, the staff viewed recession as a fairly high probability scenario though not the base case: "the staff continued to note the large amount of uncertainty surrounding trade policy and other economic policies and now viewed the uncertainty around the projection as elevated relative to the average over the past 20 years. Risks to real activity were seen as skewed to the downside, and the staff viewed the possibility that the economy would enter a recession to be almost as likely as the baseline forecast. The substantial upward revision to the inflation forecast in 2025 was judged to leave the risks around the inflation projection balanced in that year. Thereafter, the staff continued to view the risks around the inflation forecast as skewed to the upside, with recent increases in some measures of inflation expectations raising the possibility that inflation would prove to be more persistent than the baseline projection assumed."

Equities move to the session's worst levels in the last 10 minutes, though have fully recovered almost as quickly as they fell. 

• There was the biggest sell-side program of the day/week coinciding with the move, 1315 names.
• One potential factor getting attention were headlines from Ukraine's defence minister (via Reuters):
  • "UKRAINE’S DEFENCE MINISTER SAYS HE HANDED OVER UKRAINIAN VERSION OF MEMORANDUM TO HEAD OF RUSSIAN DELEGATION"
  • "UKRAINE’S DEFENCE MINISTER SAYS RUSSIA CONTINUES TO DELAY DELIVERY OF THEIR VERSION" (Reuters)"
• Cash equities remain a little weaker on the day in late New York trade, with the S&P 500 down 0.1%, and only two sectors in the green: tech and communications, both of which outperformed Tuesday as well.
• This comes ahead of highly-anticipated earnings by NVIDIA (6% of the S&P) expected after the close at 1620ET. Markets appear cautiously optimistic, with NVDA +0.9% on the day.

• Bloomberg consensus sees real GDP growth remaining at -0.3% annualized in Q1 in the second release, with a small downtick in personal consumption (from 1.8% to 1.7%) the only revision expected from median estimates.  
• Recall that last month’s advance release saw real GDP growth ‘surprise’ with -0.3% annualized for Q1. Whilst it appeared close to the -0.2% consensus, it was better than the -0.8% median from 26 analysts who had updated forecasts following March advance trade data just a day beforehand plus the Atlanta Fed’s GDPNow of -1.5%.
• Large swings in trade (-4.8pps) and inventories (+2.25pps) in Q1 on tariff front-running has made it harder to get a sense of underlying momentum in the economy. However, one notable finding in the advance release was that final private domestic purchases was robust at 3.0% annualized in Q1 after 2.95% in Q4 and an average 3.0% in 2024 – a point that was unsurprisingly made in the May FOMC press conference.
• It was helped by a surge in non-residential investment (9.8%, adding 1.3pp to GDP growth) plus consumption growth at a softer but still relatively healthy 1.8% vs an expected 1.2%. Both of course were likely boosted by tariff front-running as well.
• Powell talked on the nature of the large trade drag as well as his expectations for upward revisions: “So that could, in the second quarter, be reversed so that we have, you know, an unusually large [negative] contribution to—unusually positive. That’s very likely as imports drop sharply. You could also have—you know, very likely you’ll have restatements of the—of the first quarter. It’ll turn out that consumer spending was higher. It will turn out that inventories were higher. And so you’ll see —you’ll see those data revised up. It may actually go into the third quarter, too. And so I think it’s going—this whole process is going to, a little bit, make it harder to make a clean assessment of U.S. demand.”