EM LATAM CREDIT: XP: Notes linked to Braskem/Ambipar – Negative
(XP: Ba1/NR/BB)
• Brazil financial services firm XP issued structured notes (COEs:Structured Operations Certificates) whose returns were tied to distressed credits Braskem (BRASKM; Caa3neg/CCC-neg/CCC+) and Ambipar (NR/D/C).
• XP sent a statement to advisors on Monday informing them of big losses on these investments, according to FL Journal and O Globo. We don’t expect a meaningful impairment in XPs credit profile. We would expect some lawsuits and possibly a slowdown in earnings growth in the near term due to reputational impairment.
• XP 29s were last quoted T+235bp, 27bp tighter since June 30th and 30bp tighter YTD. There were reports earlier in the year online about XP’s sale of these COEs which may have had a negative short term impact on the company’s stock price.
• We don’t know how reliant XP was on the profits from these products. Upon examining XP financials, we see Retail comprising 77% of gross revenues with the rest coming from institutional and corporate services. The company earned BRL1.3bn in 2Q 2025 and had a return on equity of 24%.
• XP bought back BRL915mn of stock in 1H 2025. They bought back BRL1.35bn of stock in 2024 and paid BRL2bn of dividends. There seems to be capacity to pay out claims if necessary and reduce the capital distribution to shareholders. Common equity Tier 1 capital was a substantial 18.5% in 2Q while the BIS ratio was 20.1%.
• XP said that it was their final decision on the cases. The product was described as high risk and aimed at customers with a moderate and aggressive investment profile XP says on the COEs pages, as reported by FL Journal. There are likely to be lawsuits and XP could offer additional compensation if further pressure is applied as reputation is important in the competitive retail and private banking world.
• Early maturity clauses were triggered and XP informed that Ambipar COE holders would receive 6.88% fo the initial investment and in the case of Braskem would vary between 26.62% and 36.97%, according to O Globo.
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LOOK AHEAD: US Macro: PPI (Wed) and CPI (Thu) Inflation
US PPI inflation is released on Wednesday before CPI inflation on Thursday, an unusual ordering that should see core PCE implications dialled in after the CPI release rather than the usual wide range waiting for specific PPI details. PPI will be watched more closely than usual this month after a far stronger than expected jump in last month’s July report fired a warning short over tariff-based cost pressures starting to feed through. That included a 0.6% M/M increase in our preferred core series of PPI ex food, energy & trade services, which strips out items such as the then booming portfolio management & investment advice category following the strength in equity markets. It's too early to gauge an accurate sense of analyst expectations for August.
CPI inflation on Thursday will then be the last major release ahead of the Sep 17 FOMC decision. Consensus looks for core CPI at 0.3% M/M after the 0.32% M/M in July, another monthly increase comfortably above a pace consistent with 2% inflation. August should in theory start to see the largest tariff impacts along with September and possibly October. Returning to July’s report, core goods inflation was softer than expected, at a still solid (by core goods standards) 0.2% M/M for a second month running but about half that of 0.4% expected by analysts. Instead, non-housing core services surprised higher. The latter was a “dangerous” development in the words of a usually dovish Chicago Fed’s Goolsbee (’25 voter), who speaking after Friday’s payrolls report is still undecided on a September cut whilst looking for August inflation data “to get more information”.
LOOK AHEAD: US Macro: Payrolls Preliminary Benchmark Revisions (Tue)
- The BLS on Tuesday will publish preliminary estimates of benchmark revisions, based off QCEW data for Q1.
- These will give an indication of the actual benchmark revisions on the Mar 2025 level of payrolls due with the Jan 2026 payrolls report released in early February.
- Bear in mind that the final benchmark estimate tends to nearly always be more negative than the preliminary figure – see historical values to the right.
- That doesn’t mean they can’t be large again after last year’s historically negative revision that lowered the level of payrolls by ~600k. Initial estimates we’ve seen look for another large downward revision, with the smallest being worth -550k but with wide ranges higher.
FED: Barclays Adds A Cut To 2025 Fed View
Barclays analysts now expect three Fed cuts in the remainder of the year, adding October to their pre-existing call for 25bp reductions in September and December. "Given the disappointing August employment report, we expect the FOMC to see more elevated downside risks to the employment side of the mandate."
- As for a 50bp September cut, "we think that the FOMC will view [that] as sending too strong a signal that labor market conditions are deteriorating. Indeed, we think that participants such as Powell understand that the slower pace of payroll employment reflects at least, in part, slower labor supply, which does not translate into increased labor market slack."
- For 2026 they continue to expect 25bp cuts in March and June to 3.00-3.25%, but "we do not think the FOMC will be able to cut rates more than twice next year, as we think that activity will show some slight acceleration, with the economy adapting to the new tariff environment and fiscal policy providing some support, and the unemployment rate will revert down amid limited increase in labor supply."
