Brazilian bonds rally on weak growth outlook

The Brazilian government debt instrument slipped on Tuesday as investors pour into safe-haven assets amid deepening economic growth fears. The benchmark 10-year bonds yield, which is inversely proportional to the price of bonds, fell 0.62 pct to 13.60 pct and 2-year bonds yield dipped 0.30 pct to 13.36 pct at 1325 GMT.

The Brazilian central bank in its weekly forecast report lowered their annual inflation expectations again for both 2016 and 2017. This year's forecast is down to 7.14 pct, compared with 7.28 pct last week and 7.46 pct a month ago. Predictions for next year dipped to 5.95 pct from 6.00 pct both the week and month prior. Expectations for 2016's benchmark interest rate remained stable at 13.75 pct, while expectations for next year dropped to 12.25 pct from last week and last month's 12.50 pct. This year's GDP forecast went down to -3.77 pct from contractions of 3.73 pct a week ago and 3.54 pct the previous month. For next year, growth expectations were steady at 0.30 pct. Expectations for the 2016 and 2017 exchange rates were steady at 4.00 reais per USD and 4.10 reais per USD, respectively. The 2016 trade surplus is now expected to increase to $45.0bn compared to $44.8bn last week and $41.2bn a month ago. For 2017, the forecast is stable at $50.0bn.

In February, Brazil’s trend pace of industrial output contraction rebounded, declining 9.8% as compared with January’s fall of 13.6 pct, in spite of a sharp drop on seasonally adjusted and sequential basis. Also, the country posted positive data for exports on a year-on-year basis and the strongest since July 2014. Therefore, the pace of overall economic contraction is expected to have improved to -5.7 pct y/y in February from -8.1 pct y/y in January, according to Societe Generale.

The seasonally adjusted index is expected to have risen by 1.4 pct on a monthly basis. However, the data still presents certain risks on the downside to the first quarter projection of -1.4 pct q/q, noted Societe Generale. Meanwhile, on the demand side, the consumption growth seems worse than expectations, further adding to the downside risk to the Q1 growth forecast and the whole of 2016 growth forecast of -4.3 pct.

“Overall, while the February growth number looks better than the January print, the economy looks set to worsen in 2016”, added Societe Generale.