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In the United States, the personal consumption expenditures price index, which excludes food and fuel (the inflation measure preferred by the US Federal Reserve - Fed), reached +3.9% year-on-year in August, in line with expectations and lower than July's figure. As a result, and after the Fed's last meeting, the market's discounted probabilities of an additional increase in the benchmark rate (currently 5.5%) this year decreased; these probabilities now stand at 17% for November and 19% for December. Consequently, US Treasury bond yields widened across all maturities during the week, with the 1-year yield reaching 5.46%, the 3-year yield 4.81% and the 10-year yield 4.58%. Meanwhile, in Brazil, mid-September inflation accelerated to +5% y-o-y, exceeding the Central Bank's target range.

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International

In the United States, the August personal consumption expenditures price index accelerated slightly by +0.4% month-on-month and +3.5% year-on-year. However, the measure that excludes food and fuel - the Federal Reserve's (Fed) preferred measure for monetary policy decisions - showed an improvement, advancing +0.1% month-on-month and +3.9% year-on-year. It is important to highlight that the year-on-year performance was in line with expectations. With this easing, the discounted market probability of an additional 25 basis points hike in the benchmark rate (currently 5.5%) this year is 17% in November and 19% for December, when before the Fed meeting it was 31% and 23%, respectively.

In terms of activity, the Gross Domestic Product (GDP) for the second quarter grew +2.1% quarterly annualized, in line with the second estimate but lower than the +2.3% expected. Thus, it showed a slight improvement compared to the +2% annualized growth of the first quarter.  

In this context, US Treasury yields closed the week with increases across all maturities, mainly in the longer maturities. Specifically, the 1-year yield rose from 5.45% to 5.46%, the 3-year from 4.80% to 4.81% and the 10-year from 4.43% to 4.58%, remaining at 16-year highs. The average yield of Investment Grade corporate bonds (ETF LQD) stood at 6%, the highest since November 2022. On the other hand, equity indices ended mixed, with the Nasdaq rising slightly by +0.1%.

In the Eurozone, September inflation decelerated significantly, rising +0.3% month-on-month and +4.3% year-on-year, while the measure excluding food and energy posted +0.2% month-on-month and +4.5% year-on-year. It is worth noting that the year-on-year results were below estimates of +4.5% and +4.8%, respectively. As a result, the Eurostoxx 50 index ended with an increase of +0.3% and the German Treasury bond with a yield of 2.84%.

The focus for the week ahead will be on developments in the U.S. labor market during September. Specifically, unemployment is expected to stand at 3.7% and job creation is expected to come in at 150 thousand. At the same time, the Purchasing Managers' Indices (PMI) for September will be published in the United States and the Eurozone, while retail sales and the unemployment rate for August will be released for the European bloc.

Regional

In Brazil, inflation in the first fortnight of September evidenced an acceleration, increasing +0.35% monthly and +5% year-over-year, exceeding the Central Bank's target range. However, both performances were slightly below projections (+0.4% and 5.01%, respectively). Following the release of the data, the Bovespa stock index declined -1.5%. 

In Mexico, the Central Bank kept the monetary policy rate unchanged at 11.25% for the fourth consecutive time. It is worth noting that the last adjustment was 25 basis points in March. In this scenario, the Mexican peso ended -0.7% lower at 17.55 per dollar. 

Regarding the performance of Latin American sovereign debt, 10-year dollar sovereign bond yields in Brazil and Mexico went from 6.68% and 6.10% after this month's Fed meeting, to the current level of 6.78% and 6.34%, respectively.

 

Weekly Market Report

The U.S. Federal Reserve (Fed) kept the benchmark rate unchanged at the current 5.25%-5.5% range, in line with expectations. However, high rates are expected to remain higher for longer, with the estimate for this year being 5.6%, which would imply an additional hike. Specifically, the market's discounted probability of such an adjustment is 31% in November and 53% for December. As a result, US Treasury yields widened across all maturities during the week, with the 1-year yield reaching 5.45%, the 3-year yield 4.80% and the 10-year yield 4.44%. In Brazil, the Central Bank reduced the interest rate to 12.75%, in line with expectations. In addition, economic activity in July advanced +0.4% month-on-month (exceeding estimates) and +0.7% year-on-year, accumulating an improvement of +3.2% in the year.

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International

The US Federal Reserve (Fed) kept the monetary policy rate unchanged at the current range of 5.25%-5.5%, in line with expectations. However, Jerome Powell, Chairman of the Fed, stated that the rate will remain at high levels for a longer period of time, given that inflation has shown downward resistance and activity is resilient.

Regarding the quarterly update of the macroeconomic projections and the rate path, less easing is expected next year, with the rate remaining at 5.6% in 2023 and 5.1% in 2024 (4.6% as forecast in June). In this sense, the market's discounted probability of an additional 25 basis points increase this year is 31% in November and 53% for December, while a relaxation of the implemented policy could be observed only in mid-June.

Regarding inflation, it was revised slightly upwards for this year to +3.3% (+3.2% previously) and +2.5% for 2024. At the same time, core inflation -which excludes food and energy- is expected to close at around +3.7% this year (+3.9% estimated in June) and +2.6% next year. In terms of activity, a higher Gross Domestic Product (GDP) growth is expected, which would be +2.1% and +1.5% for 2023 and 2024, respectively.

In this context, US Treasury bond yields closed the week with increases across all maturities. Specifically, the 1-year yield rose from 5.42% to 5.45%, the 3-year from 4.72% to 4.80% and the 10-year from 4.33% to 4.44%, after reaching a 16-year high of 4.5% during the week. On the other hand, the average yield of Investment Grade corporate bonds (ETF LQD) reached 5.9%, the highest value in the last month. On the other hand, equity indices ended with a downward trend, led by the Nasdaq with -3.6%, followed by the S&P 500 (-2.9%).

In the Eurozone, inflation rose +0.5% month-on-month and +5.2% year-on-year, slightly below estimates (+0.6% and +5.3%, respectively). Meanwhile, the measurement excluding food and fuels was in line with expectations, registering +0.3% month-on-month and +5.3% year-on-year. Consequently, the EuroStoxx 50 fell -0.1%, while the yield on the 10-year German Treasury bond ended at 2.74%. 

For its part, the Bank of England (BoE) left the interest rate unchanged at 5.25%, in contrast to expectations of a 25 basis point increase. However, the monetary authority does not rule out additional increases, since inflation remains high. Following the decision, sterling fell -0.4% to 1.23 per dollar.

Next week's focus in the US will be on the Personal Consumption Expenditure (PCE) price index data -the Fed's preferred measure of inflation- for August, with year-on-year increases of +3.5% and +3.9% in the core expected. Likewise, the final estimate of second quarter GDP will be released, with expectations of +2.3% annualized. In the Eurozone, preliminary inflation for September will be reported, with year-on-year projections of +4.6% and +4.9% for the core.

Regional

In Brazil, the Central Bank reduced the interest rate to 12.75%, after a cut of half a percentage point. This action, expected by analysts' consensus, led the real to close the day with a +0.3% increase to 4.88 per dollar.

On the other hand, economic activity advanced +0.4% monthly in July, exceeding estimates (+0.3%). Likewise, in year-on-year terms it reached +0.7%, accumulating an improvement of +3.2% for the year. However, the Bovespa stock index fell -0.4% during the day. 

In Mexico, economic activity slowed in July, rising +0.2% month-on-month and +3.2% year-on-year, below expectations (+0.3% month-on-month and +3.5% year-on-year). Following the release of the data, the benchmark equity index ended with a -0.6% decline.  

Regarding the performance of Latin American sovereign debt, 10-year dollar sovereign bond yields in Brazil and Mexico went from 6.08% and 5.60% after the Fed meeting in July, to the current level of 6.68% and 6.10%, respectively, after the entity kept the benchmark rate unchanged. 

Next week, the focus will be on the Mexican Central Bank's monetary policy meeting (the current rate is 11.25%) and on Brazil's mid-September inflation data. At the same time, the unemployment rate for Mexico, Brazil and Chile for August will be released.