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3 Things Daily - El Nino, Davos and US-China Talks

Today's newsletter covers the economic challenges ahead for Brazil's President Luiz Inacio Lula da Silva, whose initial success, fueled...

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Marketing Team
January 18, 2024

Hi there,

Today's newsletter covers the economic challenges ahead for Brazil's President Luiz Inacio Lula da Silva, whose initial success, fueled by a bumper harvest, encounters significant obstacles in 2024. In Davos, European Central Bank officials and the Fed's Waller provided forward guidance that diverged from expectations in money markets, particularly regarding rapid rate reductions. Additionally, this week, officials from the United States and China are scheduled to meet in Beijing for financial talks, underscoring the enhanced relations between the world's top two economies.

Matheus Zani & Daniel Porto

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1. From Boom to Bust? El Nino's Return Casts Shadow on Lula's Presidency

Luiz Inacio Lula da Silva's successful economic start as Brazil's president, buoyed by a bumper harvest, faces a formidable challenge in 2024. The return of the disruptive weather phenomenon, El Nino, during the South American summer threatens agricultural stability. Torrential rains and unusual dry spells in Brazil have led to soaring prices of staples like rice and potatoes. This poses a challenge to Lula's goals, challenging both the central bank's plans for interest rate cuts and his promise to provide more affordable food. Economists, including Adriano Valladao from Banco Santander Brasil SA, express concerns about the impact of El Nino on inflation, particularly on volatile food items.

Despite a recent slowdown in annual inflation, food prices are rising due to disrupted production caused by El Nino's weather effects. As economists revise growth estimates downward, there is growing apprehension that if El Nino's severity matches that of a decade ago, it could contribute significantly to inflation in 2023 and 2024, according to a December central bank survey.

2. Rate Cut Bets in Flux

In Davos, European Central Bank officials' forward guidance and similar comments from the Fed's Waller deviated from money market expectations of swift rate reductions. Consequently, traders scaled back their predictions for rate cuts by both central banks throughout the year, extending the trend to Bank of England wagers following the release of the latest UK inflation data. Despite these adjustments, there remains unfinished market recalibration. The focus isn't solely on the extent of easing but also on the anticipated pace. In this scenario, the dollar emerges as a beneficiary, while the Swiss franc faces the potential for additional depreciation.

3. Financial Diplomacy: US-China Talks Signal Improved Relations

US and Chinese officials are set to convene in Beijing this week for financial talks, highlighting the improved relations between the two largest economies. The discussions, part of the "financial working group" talks established last year, will address issues such as financial stability, capital markets, narcotics, and terrorism funding. Despite the positive turn in US-China relations in the latter half of 2023, challenges persist, including tensions over Taiwan, actions in the South China Sea, trade, and export controls. The financial working group emerged after a visit by US Treasury Secretary Janet Yellen to China, further cementing ties. These talks follow a meeting between Presidents Joe Biden and Xi Jinping in November, emphasizing efforts to stabilize the relationship.

Charted Territory

What to look out for today

World Economic Forum - Davos
BRL - IBC-Br Economic Activity (Nov)
EUR - ECB President Lagarde Speaks
USD - Initial Jobless Claims

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