DAILY STRATEGY: A recurring question in meetings is whether the Fed will raise rates. Our view is that the Fed will likely accept slower growth rather than hike rates. The economy SHOULD slow from the current unusually strong pace of underlying demand* as the fiscal impulse and post-tariff reacceleration tailwinds fade (consumer, business activity-ex AI – and hiring trends seemed paused in 2H25). If growth slows as we expect, the Fed is unlikely to cut. I.e. they will accept slower growth. Our call supports some flattening of yield curves over the next 3 – 6 months but is not negative for risk assets. Slower growth reduces inflation risk and inflation is the major constraint on the cycle now (HERE). FYI – our longer term view is higher deficits = steeper yield curves (HERE), hence the 3-6 month flattening call.
*Underlying demand = the sum of consumer spending and investments components of GDP. Generally considered a cleaner measure of economic activity as it removes the noise from exports and inventory swings. Underlying demand is currently estimated to be running at +3% in 2Q26.
Long Domestic Brazil – we were lucky enough to host a webinar this week with João Landau, Founding Partner & CIO of Vista Capital, one of Brazil’s leading hedge funds. Replay link HERE.
João thinks there is asymmetric upside in domestic-facing Brazil equities, with the presidential election as a catalyst.
The background supports are: 1) real interest rates stabilized around 8% over the past year, 2) the unemployment rate has reached historic lows (~5%), 3) inflation has exceeded forecasts but remains relatively contained given the urate (this has been a major surprise), and 4) Brazil’s equity market valuation has reached decade lows, with IVBX P/E ratios around 12x.
The upcoming election has been an overhang on the index. In short, investors REALLY dislike President Lula and Lula’s odds of winning have recently increased. But President Lula faces hurdles in re-election amid low approval ratings, especially among evangelicals and youth. The polls are misleading in Joao’s view. If Lula loses, there is asymmetric upside in Brazil equities that are more domestic facing. Joao made the case that local investors with money are likely to reallocate a significant amount of capital back to local Brazil if Flavio Bolsonaro wins.
Joao notes it is underappreciated that fiscal adjustments, which are needed in some form, does not have to come with large hits to growth and significantly higher recession odds, particularly because the economy is starting from a point of strength. Own the EWZ ETF ex commodities. Commodities are largely driven by factors outside of Brazil but have large representations in indices. PBR (Petroleo Brasileiro) is an oil company with a 14.5% weight in the EWZ ETF. EWZ ex commodities, charted below, have fallen -14% as Lulu’s odds of winning the election have improved, which provides an interesting opportunity to be long now.
Charts below…
