BRAZIL: IPCA Inflation Moderating as Expected, Jan Rate Cut Still Possible
- Today’s IPCA-15 CPI data offered few surprises and left inflation on course to end the year around the BCB’s expectations at 4.4% y/y. Beyond that, the central bank sees inflation easing to 3.5% next year, according to last week’s monetary policy report, before moderating to 3.1% in 2027 and returning to the 3.0% target in Q1 2028. (See Chart 1 below.)
- The data provide little new information for the interest rate outlook. Although most analysts still expect an easing cycle to begin in March, BCB Governor Galípolo failed to explicitly rule out the chances of a rate cut in January last week. Galípolo said the lack of a clear signal for an interest rate cut at the January meeting does not mean that the option has been ruled out. Instead, he said that decisions will be based on information and the economic outlook available at each meeting as conditions evolve.
- CPI inflation fell to its lowest level since September 2024, as expected, in H1 December, supported by a further decline in food inflation, which continues to normalise from last year’s drought. In contrast, transport prices picked up amid an increase in airfares, while clothing prices rebounded following the end of November sales. Overall, core inflation remained just below the BCB’s target range ceiling.
Looking ahead, focus turn to full month December IPCA data on Jan 09, followed by Jan IPCA-15 figures, which will be released around a week before the next Copom meeting on Jan 28. According to yesterday’s BCB Focus survey, economists see the Selic rate falling from 15% to 12.25% this year (marginally above prior 12.13% estimates).
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RATINGS: Moody's Upgrades Italy To Baa2 From Baa3, Still A Notch Below Others
The Moody's upgrade to Italy's credit rating announced late Friday was the first from the agency since 2002 but shouldn't be considered a major surprise. Among the 3 major ratings agencies, Moody's had the lowest rating on Italy - by two notches (Fitch and S&P both BBB+).
- So this upgrade to Baa2 from Baa3 represents something of a closing of that gap rather than a major breakthrough for Italy.
- From the release:
- "The rating upgrade reflects a consistent track-record of political and policy stability which enhances the effectiveness of economic and fiscal reforms and investment implemented under the National Recovery and Resilience Plan (NRRP). It also points to prospects of further policy actions supporting growth and fiscal consolidation beyond the plan's deadline in August 2026. As a result, we expect that Italy's high government debt burden will gradually decline from 2027 onwards."
FED: Heading Into Its Final Weeks, QT Pace Remains At $20B/Month (2/2)
On the asset side of the Fed balance sheet, we saw a $25B drop in assets, of which just $2B could be attributed to QT in one of its final weeks (ends Dec 1).
- Instead it was a $6B drop in dealer repo operations vs a week earlier, and $17B in "other" areas that aren't related directly to monetary policy and typically don't have any significant impact on the size of the balance sheet (such changes are largely due to items such as bank premises, accrued interest, and other accounts receivable.)
- Discount window takeup edged up $0.3B to $6.1B but remains relatively low.
- QT has totaled just under $21B over the last month, around the expected pace, though as noted this will flatline in December with a pickup in net bills as MBS proceeds are rolled over into T-bills.
LOOK AHEAD: US Week Ahead: Retail Sales, PPI & Claims Headline Thanksgiving Week
A Thanksgiving-condensed week sees data highlights from delayed retail sales and PPI reports for September on Tuesday (Nov 25) before a Wednesday release for weekly jobless claims (Nov 26). Aside, the Fed’s Beige Book should also offer another important update on Wednesday for latest liaison reporting, with no Fedspeak currently scheduled around the holiday and the FOMC media blackout due to start on Saturday, Nov 29.
- As we regularly comment in this weekly publication, Redbook and Chicago Fed CARTS indicators point to solid nominal growth in retail sales, something broadly reflected in analyst consensus for the release.
- PPI inflation will offer a useful albeit not overly timely update on input cost pressures.
- Jobless claims will be watched particularly closely, both for latest initial claims for signs of layoffs and a notable update for continuing claims. The latter covers the payrolls reference period for November and will be an important reference point for FOMC members trying to get a sense of latest unemployment rate clues with the next payrolls reports coming after the Dec 9-10 FOMC decision (going into it with this week’s 0.12bp rise to 4.44% back in September).
