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Brazil rate futures slip as first deflation in 11 years stokes rate-cut bets

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Brazil registered in June its first deflation in 11 years while yields on short-term Brazilian interest rate futures ALSO fell on Friday after monthly consumer prices declined for the first time in 11 years, the state statistics institute IBGE said.

Meanwhile, consumer prices rose 0.35 percent in the month compared to the same month last year. The deflation was attributed to a long-term recession which has plagued Brazil.

The annual inflation rate fell to 3.00 percent, at the bottom end of the central bank’s target band of 4.5 percent plus or minus 1.5 percentage point. A weaker-than-expected economic recovery has weighed on Brazilian inflation and allowed the central bank to cut the benchmark Selic rate from its highest level in eight years.

The bank has been signaling since its last policy meeting that it could reduce the pace of rate cuts to 75 basis points per meeting, from the current 100 basis points, because of growing political uncertainty.

Those bets lost some steam after the IPCA release. Rate-future yields indicated traders saw a 70 percent chance of a 100 basis-point cut to 9.25 percent at the central bank’s July meeting, with a 30 percent chance of a slower 75 basis-point reduction.

Bets were evenly split on Thursday. The Brazilian real strengthened 0.3 percent, in line with Latin American currencies such as Mexico’s and Colombia’s pesos. Demand for emerging market assets rose after a report showed stubbornly sluggish U.S. wage growth in June despite stronger-than-expected jobs growth.

The report was the latest in a batch of mixed economic indicators that have left traders skeptical over the Federal Reserve’s plan to increase rates once more this year and three times next year.