Moody’s downgrades Brazil to Baa3
by Arnaud Masset
After having changed Brazil’s rating outlook from stable to negative last September, Moody’s finally downgraded Brazil’s government bond rating to Baa3 from Baa2 and changed the outlook to stable. The decision was broadly expected and came on the back of disappointing economic performances, missed primary surplus targets and political jitters that leave investors facing a foggy outlook.
According to the latest weekly economic survey released by the Central Bank of Brazil (BCB) on Monday, market consensus growth estimate declined from -1.80% to -1.97% for 2015 and from 0.20% to 0.0% for 2016 as bad news keep piling up. More worryingly, inflation expectations for 2016, which had seemed to have finally anchored throughout July, are on the rise again as economists expect IPCA inflation to reach 5.44% in 2016 versus 5.40% a week ago. Given the political instability, which will likely result in an increase in government’s spending, together with rising inflation expectations, we think that the BCB will have no choice but to increase interest again. USD/BRL closed at 3.4743 in the previous session and is expected to open higher given latest developments.
Japan’s PPI change at its lowest since 2009
by Yann Quelenn
Last night, the Japan’s Producer Price Index fell to 3% year-on-year from -2.4% y/y in June, its lowest change since 2009. It also decreases more than the estimates at around -2.9% y/y. Japan’s Abenomics is currently failing to stimulate consumer spending in order to enter into the virtuous circle of growth and inflation. Besides, PPI and CPI usually move together and follow the same trend which shows that Japan’s monetary policy is still not efficient. In addition, the fiscal arrow of the Abenomics had a single effect: reducing consumer spending. Increasing VAT from 5% to 8% - from an original idea of the IMF - had a spectacular impact. The other VAT increase which was initially set to be in 2016 has been postponed in 2017. Therefore, as time goes by, it becomes more and more difficult to see any success in the Abenomics. In particular the country is largely hit the collapse of commodity price. Last Friday, the Bank of Japan governor’s Haruhiko Kuroda stated that he would trigger more stimulus if the weak oil prices persist to hold inflation at a very low level. The yen monetary base will increase again. It currently increases at a pace of yen 80 trillion a year. We remain bullish on the USDJPY which is still trading at its highest level since 2007. We expect the pair to increase again above 125.