The first rate cut: the Selic confirmed what the market had already read

Derivative

The extreme

Through the whole 2016 bottom, the cost of money did not move. Month after month, the Selic showed up nailed at 14.25% a year — in February, in March, in June, in September — while the market's structure was already flipping sign and inflation was draining away (the IPCA fell to 0.43% in March and to almost nothing in September). The high rate was the backdrop that demanded coherence from any optimism. And it stayed put well after the market had begun to turn.

What happened next

The first cut came only a year after the structure turned. In March 2017 the Selic ended at 12.25% a year — and, in that same month, the intermarket crossed into strong risk-on (70.6), the most aggressive appetite of the recent series. Capital had already repositioned across the Brazilian classes; the lower rate arrived to ratify a move that the relative prices had been drawing for months.

What didn't happen

The cut was not the trigger of the recovery. Anyone who waited for the Selic to give way before believing in the turn would have missed the whole year in which the structure led — March 2016 was already flipping with the rate intact at 14.25%. And the cut did not ignite euphoria either: in that same March 2017, the Ânima fell back to 36.3, cooling while the flow was heating up. The rate confirmed; it did not command.

Honest verdict

The Selic stayed high until the market had already turned, and the first cut arrived to confirm what the relative prices had read a year before. The rate is the last piece to move — it confirms the recovery, rarely starts it.

Continue the story: The 2016 bottom — structure before mood · Structure leads mood · What the Selic is →

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Characters: Rates (Selic) · Structure (intermarket) · Mood