Morning Note /

Brazil back in the spotlight as global inflation fears intensify

  • Talking points: Brazil’s agri sector in focus as global food prices soar

  • Fixed Income: Brazilian bond curve bear steepens as fiscal fears outweigh hawkish bets

  • Forex: BRL reverses earlier gains to end the session more than 1% in the red

Kieran Siney
Kieran Siney

Head of African Markets

ETM Analytics
28 September 2021
Published byETM Analytics

Talking points

  • Inflation and monetary policy remain the focal point today with the BCB scheduled to publish its September meeting minutes. Today will also see the release of the latest jobs report, which will provide some insight into demand-side inflationary pressures. Both releases have the potential to result in fresh price action.

  • Brazil has made its way back into the international spotlight after a ruined harvest triggered a global spike in food prices. It has been a hard-hitting year so far for Brazilian farmers as the combination of frost and the worst drought in a century scorched crops. This has sent shockwaves across the global agri market. Data published by Bloomberg shows that Brazil contributes 75% of all global exported orange juice, 54% of global soy, 50% of global sugar, 32% of global coffee and 22% of global corn. As such, the impact of scorched crops in Brazil has hard-hitting ramifications for the global food outlook, with the supply shortages contributing to a surge in international food inflation. Bloomberg data showed that the cost of Arabica beans soared 30% over a six-day stretch in late July, while orange juice jumped 20% in three weeks and sugar hit a four-year high in August.

  • Concerningly, scientists project that rising global temperatures and declining soil humidity will increasingly wreak havoc on farming regions in Brazil. As such, with global demand expected to increase against the backdrop of increasing supply concerns, food price inflation is expected to remain elevated in the months ahead. That said, rains have been solid for the past two weeks, which should result in planting next season being at a record high, but that doesn't necessarily mean that harvest will be.

  • This comes against the backdrop of soaring global oil prices with the international oil benchmark, the front month Brent contract, breaching the psychologically important $80/bbl mark for the first time in 3 years this morning. Focus in the oil market today will fall on OPEC’s World Oil Outlook report. The report will provide insight into what may happen at the next ministerial meeting, scheduled for 4 October. With demand forecasts likely to be revised higher for this year, it will not be surprising to see the report pre-empt a faster increase in output in October as the cartel will look to keep the market in balance. However, the question is whether OPEC’s members have the ability to ramp up output enough to offset the current surge in demand.

Fixed Income

  • The combination of soaring international food and oil prices, together with the persistent weakness in the local currency and still elevated money supply growth, suggests that inflation risks are skewed firmly to the topside. Breakeven rates in Brazil, which reflect market inflation expectations, continued to rise on Monday. Specifically, the 2yr breakeven rates climbed 6bps yesterday to end the session at 5.55%. Note that at the start of the year, the 2yr breakeven rate stood at 3.59%. The escalation in topside inflation risks in recent days is underpinning market bets that the central bank could deliver a larger than 100bps rate hike next month.

  • In line with the broader emerging market bond sell-off, yields across the Brazilian bond curve traded higher yesterday. Soaring commodity prices together with a further depreciation in the BRL saw the shorter-dated 2yr bond yield climb 11bps yesterday to 9.62%. Concerns over a possible popularist shift in policy by President Jair Bolsonaro ahead of next year’s general election and a deterioration in global risk sentiment amid renewed fears relating to China drove longer-dated Brazilian bond yields higher on the day. Adding to the headwinds yesterday was data that showed that Brazil’s federal debt rose to BRL 5.48trn in August from BRL 5.40bn in July. The benchmark 10yr yield rose 12bps to 11.09% on Monday. Looking ahead, with inflation and fiscal risks tilted to the upside, we expect the bearish bias in Brazilian bonds to persist in the near term. That said, the sell-off in Brazilian bonds is long in the tooth, and as such, if there were to be an improvement either on the fiscal or inflation fronts, we do see room for a notable correction in local bonds.


  • It was a downbeat start to the week for the BRL, with the local currency reversing its earlier gains to end the session deep in negative territory against the USD on Monday. Specifically, the BRL lost 1.06% against the USD yesterday to close the session at more than a one month high of 5.3911. Concerns over the fiscal outlook for Brazil driven by fears that President Bolsonaro will push for increased spending ahead of next year’s presidential election outweighed bets that the BCB will scale up its policy normalization, resulting in additional pressure on the BRL.