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Near-term forward rate spread and commodity index relationship with real economic activity in Brazil

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  • Schlömer, Johnny Barrelli
  • Palazzi, Rafael Baptista
  • Klotzle, Marcelo Cabus

Abstract

This study investigates the relationship between Brazilian economic cycles and two key indicators: the international S&P GSCI commodity index and the near-term forward spread derived from the Brazilian interest rate term structure. We find that the forward spread serves as a robust leading indicator of economic downturns in Brazil, offering recession forecasts up to four quarters in advance. This underscores a link between yield curve steepness and recession likelihood in Brazil. However, we uncover distinct cyclical behaviors in Brazil's term structure that diverge from patterns in the United States. Furthermore, our research reveals the significant influence of commodity price fluctuations on Brazil's economic performance, underscoring a strong correlation between commodity markets and economic outcomes. Examining term structure and commodity prices together provides novel insights into monitoring emerging market cycles. These indicators can assist policymakers and improve early warning systems, especially in developing economies like Brazil.

Suggested Citation

  • Schlömer, Johnny Barrelli & Palazzi, Rafael Baptista & Klotzle, Marcelo Cabus, 2024. "Near-term forward rate spread and commodity index relationship with real economic activity in Brazil," Finance Research Letters, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:finlet:v:65:y:2024:i:c:s1544612324005130
    DOI: 10.1016/j.frl.2024.105483
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    References listed on IDEAS

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