How Lula can make a fire from the optimistic straw fire in the market – 04/12/2023 – Vinicius Torres Freire

Animations and paniquitos in financial markets are often a flash in the pan. For two days now, the straw that has been burning is excitement, although interest rates in the market have already been falling for a month and a half. The question is whether it is possible to make a longer lasting fire with this brief animation.

Yes, how would it have been possible to do so since the end of the 2022 election, if the government had not decided to punch a knife and shoot itself in the foot from November onwards, leaving in the air the idea that it could do nothing to respect of deficits and public debt.

As was predictable, the announcement of the “New Fiscal Rule” (NRF) or “new fiscal framework” helped, as did the fact that Luiz Inácio Lula da Silva made a speech in support of Fernando Haddad before going to China. Prices were at such bad levels in the financial market that the mere removal of a goat from the room contributed to the appreciation of stocks, in addition to bringing down interest rates and, importantly, the dollar. We are taking advantage of a downward wave in the US currency and the inflow of money from agribusiness exports. If things stay there or even with the dollar at R$ 4.90, it would be a big relief for inflation.

But there’s still a herd of goats in the room. Furthermore, it should be repeated, the animation these days is driven by the almost general fall of the dollar around the world, an unstable movement dependent on volatile speculations about US inflation.

In these days, the belief that American inflation will subside has once again spread. The Fed, their Central Bank, therefore, would end the campaign to raise interest rates by the middle of the year. Could it be. And what if the drop in inflation is associated with a recession in the United States, however small? Good or bad?

Over here, we have the herd in the living room to look after. The NRF took one of the goats out of the room, but one of its brothers was left sitting on the sofa, chewing on the cushion. That is to say, if the “new fiscal framework” is approved, the debt will not explode, except in an unlucky scenario. But it will stay high for a long time, in a moderately optimistic scenario, which prevents expectations from becoming more positive, faster (lower interest rates and the dollar).

The NRF still needs to be approved by Congress. The group there seems willing to collaborate, but there has still been no test of the government’s ability to gather votes (and there is no measure of what Lula will have to give in return).

We continue to learn what this new configuration of Congress means (strong right and extreme right, medium negotiator parties in the past in charge, etc.). Blocs and blocs are organized against the back of the government, which is afraid to intervene and get tripped up. PT and PL were somewhat isolated. A contraption with the face of negotiator “semi-parliamentaryism” is very much alive.

After approving the NRF, it is necessary to arrange the money, taxes, that will put it into operation. It is not simple, as can be seen from the sururu caused by the government’s attempt to limit smuggling in e-commerce.

The government has a reasonable plan for the year. He says that he will soon present measures to improve credit guarantees, others to facilitate PPPs and he is confident in the approval of the tax reform. If you manage to touch all that, the panorama will change, even if the fiscal plans are not so wonderful.

This is Brasilzinho at its best: it’s not even slow and steady, but slow and now and then.

It is also important that the government does not give one to the nail and another to the forehead, with a horseshoe. Messing around with state law or Petrobras (losing revenue, among other problems) will spoil the small but important gains it has achieved in these last two weeks.

PRESENT LINK: Did you like this text? Subscriber can release five free hits of any link per day. Just click the blue F below.