Market sees greater chance of maintaining interest rates after strong payroll

The intermediate and long peaks of future interest rates renewed their maximum this afternoon and reached the highest levels since March and April 2025, respectively, at a time when the Copom (Monetary Policy Committee) was still raising the Selic rate.

With the rise in rates, the majority bet (68%) is now that the basic interest rate will remain at 14.50% per year at the June meeting.

The change in outlook comes after the United States employment report, payroll, showed job creation well above the ceiling of estimates and caused the financial market to increase the chances of an interest rate hike by the Fed (Federal Reserve) in the second half of 2026.

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This is a new ingredient for the perfect storm in favor of high interest rates for longer, which already included the deterioration of inflation expectations, the devaluation of the real and electoral uncertainty.

The DI (Interbank Deposit) contract for January 2027 rose to 14.43%, from 14.295% of Wednesday's adjustment. The rate for January 2029 increased to 14.81%, from 14.427%, and that for January 2031 rose to 14.71%, from 14.409%.

The US created 172 thousand jobs in May, in net terms, above the ceiling of estimates of 125 thousand jobs and median of 85 thousand. Bradesco's team of economists, led by Fernando Honorato Barbosa, stated that "the relevant difference compared to April when it created 115 thousand jobs is in the Fed's reaction function: with the backdrop of inflationary pressure via energy (Middle East and Hormuz), the resilient market combination brings the FOMC's focus back to inflation."

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And in fact, the market started to see greater chances that the Fed will raise interest rates in September (from 23.2% before the release of the payroll to 38.4% around 12pm Brasília). The majority bet, however, is still maintenance, which fell from 74.1% to 60.5%.

"The payroll was a trigger and additional pressure for Brazilian future interest rates", comments economist Carlos Lopes, from BV bank, highlighting that here investors take a lot of the chance of a fall in the Selic rate at the next meeting.

"We have a drop of 8 points priced in for June 18th, so the greatest probability is of a stop. The market is now waiting to see if the BC will give any signal against this pricing, or if it will remain silent", he states. A reduction of 8 points in the curve represents a 68% chance of maintaining the basic interest rate at 14.50%, and a 32% chance of a 0.25 percentage point cut.

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The local correction in fixed income, however, was already supported by a series of other concerns: the inflation numbers themselves and expectations regarding the war lasting longer, adds Lopes.

BofA (Bank of America) mentioned the deterioration in current inflation dynamics, the increase in inflation expectations and a weaker real to support its change of scenario, which foresees just another 0.25 pp cut in the Selic in June and a signal from the Copom to pause the easing cycle.

Thus, the bank raised its projection for the basic interest rate at the end of 2026, from 13.25% to 14.25%, and at the end of 2027, from 12.50% to 13.25%.

"The payroll has completely reversed the scenario. Maybe the Copom has room for one more interest rate cut, and no more. Maybe not even this one in June", assesses Marcos Praça, director of analysis at ZERO Markets Brasil.

High interest rates worry 69% of Brazilians about the increase in the cost of living

Source: CNN