Brazil\u2019s S&P Global Manufacturing PMI rose to 50.8 in June from 49.1 previously, moving back above the 50.0 threshold that separates expansion from contraction. The reading indicates a return to growth conditions in the manufacturing sector after a period of deterioration.<\/p>\n\n
The survey\u2019s headline index, compiled by S&P Global, shows an improvement in overall operating conditions at the end of the second quarter. June\u2019s level implies a modest upturn following the prior month\u2019s sub-50 performance, signalling that output, new orders and employment conditions were, on balance, stronger than in May.<\/p>\n\n
The jump in Brazil’s manufacturing PMI to 50.8 is a significant bullish signal for us. Moving from contraction in May to expansion in June suggests the economic slowdown might be bottoming out sooner than expected. This positive surprise should cause us to re-evaluate bearish positions on Brazilian assets.<\/p>\n\n
We believe this data supports a rally in the Ibovespa index, as improved manufacturing activity can translate to better corporate earnings. The index has been struggling to break past 135,000 points, and this could provide the necessary catalyst. We are considering buying August call options on the EWZ ETF to capture potential upside in the coming weeks.<\/p>\n\n
This stronger economic data should also attract foreign capital, providing support for the Brazilian Real. The USD\/BRL exchange rate, which recent central bank data shows has averaged around 5.10 in the second quarter, could now test the 5.00 level. We see an opportunity in selling short-dated put options on the BRL, betting on reduced downside volatility.<\/p>\n\n
This shift to expansion complicates the outlook for the Banco Central do Brasil’s next interest rate decision. With the Selic rate currently at 9.5%, markets had been pricing in a rate cut by the end of the third quarter. This strong data significantly reduces those odds, as the central bank may prioritize keeping inflation in check, which stood at 4.1% annually in May.<\/p>\n\n
Historically, a sustained move above the 50 mark in the PMI has preceded periods of economic acceleration, as seen in the recovery of 2021. While one data point isn’t a trend, the size of the jump from 49.1 to 50.8 warrants our attention. Our focus will now be on unwinding bets on aggressive rate cuts in the interest rate futures market.<\/p>\n\n\n\n