OFFSHORE INVESTMENT STRATEGY

In March, inflation measures released in the United States generally came in slightly above expectations, while activity indicators were stronger. The core CPI inflation indicator remained elevated, increasing by 0.4% in February, again slightly above expectations, and the 12-month cumulative index showed core inflation of 3.8% year-over-year (YoY), excluding more volatile components like energy and food. Meanwhile, inflation as measured by the GDP deflator, which is the price measure used by the Fed (the U.S. Central Bank) as a target for its monetary policy, saw a rise in the 12-month cumulative inflation from 2.4% to 2.5%, although the core inflation observed a slight decline to 2.8%, still above the 2% target. The economy added 275,000 jobs, and the unemployment rate increased from 3.7% to 3.9%, while the average wage remained above 4%. This indicates an economy at full employment, with wages rising above inflation, denoting a heated labor market that appears unaffected by the interest rate hike from 0 to 5.5%. The real estate market continues to show weaker sales data and fewer refinancing requests, which is practically expected as Americans are reluctant to part with properties financed at low-interest rates—around or below 5%—and refinance at rates above 7%. Despite this, the significant shortfall in the number of homes built since 2009, noted even by the Fed chairman, supports the market, preventing significant price corrections in the foreseeable future.

In its March meeting, the Fed's monetary policy committee, the FOMC, again decided to keep the federal funds rate stable in the 5.25% to 5.50% range. In the new quarterly projections, although it maintained the projection of 3 rate cuts of 0.25% for 2024, the highlight was the committee's reduction to 3 cuts also in 2025, compared to 4 in the previous projections made in December. Additionally, there was a slight increase in inflation and growth projections. It's important to note that this March meeting was the one in which, until early February, the market almost unanimously expected the first rate cut in the U.S. Instead, not only did the cut not occur, but the FOMC's communication and its members throughout the month suggested that since the labor market and economic activity remained strong, there were no conditions to give the committee confidence to start a cut in the short term. Gradually, market expectations shifted to a rate cut only in May, and soon after, to June, meaning two meetings later than what had been considered most likely until then. However, in March, this delay was not enough to stop the U.S. stock market from continuing its strong start to the year, driven by still solid economic growth and good corporate results, especially with the positive outlook for profits tied to the increasing use of technology in global companies.

It's worth noting that in the Eurozone, inflation was reported slightly below market consensus and the previous reading. Although it is still uncertain when the initial rate cut will occur there as well, the scenario is consolidating as more likely that the ECB, the European Central Bank, will cut rates—currently at historical highs—before the Fed. Finally, in Asia, we observed mixed data in China, with domestic consumption apparently slowing further, although production data showed consistent growth at the beginning of the year. In Japan, the BOJ, the Bank of Japan, marginally raised interest rates, making them positive for the first time in eight years, in response to negotiations with organized unions that point to wage increases of nearly 4% for 2024.

‍

‍