US + Brazil Financial News (10/2)

Nonfarm payrolls for September is the main event this week. Usually a key indicator of activity, this reading will be biased by the impact of the hurricanes. As we have said, the expectation is that, as in the past, they will have mainly a timing effect: Lower employment and output in the months immediately following, compensated by above normal pickup in subsequent months and quarters. Forecasts for September are for a low number, below 100k. However, in recent speeches, Fed speakers—most noticeably Yellen herself—held on to hawkish stances, dismissing not only the effect of temporary shocks but also of the unusually low readings for their preferred measure of inflation, the core PCE deflator. In August, inflation by this measure, posted last week, fell to 1.4%yoy. The week will bring a slew of Fed speeches. They may be more relevant for forecasts than the NFP number, although we know that the Fed itself is likely to change in the near term.

The week will also mark the start of the Congressional fight for tax reform. The tax plan released by the White House this week was largely in line with expectations. The plan would lower the federal statutory corporate tax rate to 20% (from 35% currently) and enable corporations to repatriate overseas cash at a reduced rate. As proposed, we have little doubt, following estimates from key forecasters and the CBO, that the effort, if approved as proposed, would usher in a decade of unusually large fiscal deficits. With debt/GDP already at 77.4%, and the economy at full employment, the result may be an increase in perceptions of risk which, together with the selloff of Treasuries by the Fed, could trigger a sharper increase in long-rates. This, of course, would feedback into the deficit itself. It could also diminish the propulsive impact of tax reductions. In the event, there is no empirical evidence to show that the kind of “dynamic scoring” proposed by the administration will take place. At best, the impact on growth of the tax reform would be the proverbial “flight of the chicken.” A short-term boost without sustained flight.

Data last week was all positive. The primary deficit of the consolidated public sector measured R$9.5bn instead of the expected R$17bn. The difference was due to a gain in tax revenue. The improvement will be fleeting. Nevertheless, income from privatization, and a last-minute agreement (Refis) on repayment of taxes overdue, will save the fisc. Congress wanted to approve a deal that would actually cost the Treasury! The bargained result has a miniscule payment (R$2bn from more than R$20bn due) but at least does not increase the subsidy. Expectedly, the monthly current account deficit continued to decrease, from US$3.4bn in July to US$0.3bn in August. Meanwhile, the monthly flow of FDI increased to US$5.1bn. Credit to the private sector from private banks improved; and, finally, the unemployment rate fell from 12.8% to 12.6%.

The good news is welcome reprieve from the negative political headlines. The Lower House approved a political reform that, expectedly, eschewed any significant change and yet increased public funding for the campaigns. The Senate is likely to follow suit. Meanwhile, President Temer faces a second Congressional vote on whether he should be tried by the Supreme Court for misconduct and corruption. The Lower House will not approve it (a motion that would require a 2/3 majority). However, the politics of the vote will stop all other legislative work, and could cost the budget some additional amounts. We have long since given up on approval of the Social Security reform during this administration.