Future interest rates close slightly lower with focus on inflation and US debt ceiling

The rates on futures contracts fees ended Friday with a slight drop, but close to stability, with investors reacting to new data from inflation disclosed in USA and the expectation of an agreement between the White House and the Republicans regarding the expansion of the US debt ceiling.

In the morning, the Commerce Department reported that consumer spending in the US jumped 0.8% in April, above the 0.4% projected by economists polled by Reuters.

The PCE price index rose 0.4% in April, after rising 0.1% in March. The core gauge rose 4.7% year-on-year in April, after rising 4.6% in March. The PCE is heavily monitored by the Federal Reserve.

Inflation data raised the prospect that the Fed will raise interest rates again in June or July to curb rising prices. That supported the rise in two-year (short-term) Treasury yields, but ten-year Treasury yields eased in the afternoon.

If, on the one hand, the data showed inflation still accelerating in the US, on the other hand, a survey by the University of Michigan with consumers showed an inflation perspective over the 1-year horizon of 4.2% in May, compared to 4.6% at the end of April.

At the Brazilafter the sharp decline in rates the day before, due to the deceleration of the Extended Consumer Price Index-15 (IPCA-15), future interest rates did not have the strength to go one way or the other.

“Yesterday’s IPCA-15 (Thursday) still has an impact, but abroad the PCE deflator was stronger, and Michigan’s expectation index indicated slightly lower inflation. One ends up counterbalancing the other”, pointed out economist Rafael Pacheco, from Guide Investimentos.

Investors were also operating in expectation of an agreement on the debt ceiling in the US. A source heard by Reuters said that the US president, Joe Bidenand the top Republican in Congress, Kevin McCarthy, are closing in on a deal that will raise the government’s debt ceiling for two years, limiting spending on most items.

The deal, which is not final, will increase funding for discretionary military and veterans spending, essentially keeping non-defense discretionary spending at current year levels.

For José Faria Júnior, director of the consulting firm Wagner Investimentos, there is “zero chance” that the US will not reach an agreement to expand the debt ceiling, even though the negotiations may drag on until the deadline considered to be the limit –June 1– or until a little after him, but without major consequences.

“I think the North American curve is contaminated with the effect of the debt ceiling issue. Even with the inflation data that came out today (Friday), it is difficult to say whether or not the Fed will raise interest rates further,” said Faria Júnior.

In this scenario of lack of definition abroad, investors little changed positions in the interest rate futures market in Brazil this Friday.

By late afternoon, the DI rate for January 2024 was at 13.175%, compared to 13.186% in the previous adjustment, while the DI rate for January 2025 was at 11.435%, compared to 11.477% in the previous adjustment. Among the longer contracts, the rate for January 2026 was at 10.895%, compared to 10.939% in the previous adjustment, and the rate for January 2027 was 10.94%, compared to 10.994%.

Close to closing, the forward curve priced in a 22% chance of the Central Bank reducing the Selic rate by 0.25 percentage points at the June monetary policy meeting and a 78% probability of maintaining the rate at 13.75% per annum .

At the end of the afternoon, the North American curve continued to indicate an increase in rates in the short end and a fall in the long end.

To the 16:42 (from Brasilia), the two-year Treasury yield – which reflects bets on the direction of short-term interest rates – was up 5.80 basis points, at 4.5682%.

The ten-year Treasury yield – the global benchmark for investment decisions – fell 0.50 basis points to 3.81%.