On Tuesday, we highlighted what WSJ called an “extraordinary” turn of events in Brazil’s ongoing political crises.
An angry letter penned by VP Michel Temer was published in its entirety by virtually all local media, in what amounted to a very public display of Temer’s disaffection with embattled President Dilma Rousseff. Over the course of some 1,000 words, Temer accuses Rousseff of everything from demeaning the position of the Vice President to deliberately excluding him from a meeting with Joe Biden on the way to concluding that the Brazilian President does not and never will trust the opposition PMDB (of which Temer is a member).
Gabriel Petrus, a political analyst at business consulting firm Barral M Jorge told Bloomberg that Temer is “opening the door for a possible break with the government,” and although “he may not be actively promoting impeachment, this could well heighten the chances of her ouster."
We went on to outline the impeachment process before speculating on how the market would react to a variety of political outcomes.
Rousseff got some respite late Tuesday when the Supreme Court suspended impeachment proceedings pending a December 16 debate on their constitutional validity and an examination of a controversial house vote that nearly caused yesterday’s session to “collapsed into chaos,” as Reuters puts it.
“The Communist Party of Brazil, a small party in Rousseff's coalition, raised the constitutional issue in an injunction filed last week,” Reuters goes on to report, adding that “the injunction said a 1950 law laying out impeachable crimes by a president was not compatible with Brazil's 1985 constitution.”
The court says it’s attempting "to avoid acts that could eventually be invalidated.” Rousseff appointed Justice Luiz Edson Fachin who made the decision.
Of course as with all things Brazil, there’s no telling who this actually benefits and it is thus impossible to determine how the market “should” react. The “delay may be seen as positive to the opposition, which prefers to push proceedings further into 2016 as economic deterioration outlook may further hurt Rousseff’s support,” Bloomberg’s Davison Santana writes. In other words, the longer this takes the better, because the economy is only going to get worse in the meantime which reflects poorly on Rousseff, increasing the chances she gets the boot and thus calming markets - or something.
While we’re not sure that longer is actually better here given that Speaker Eduardo Cunha’s fate hangs in the balance, we certainly agree that the economic situation is set to deteriorate further and on Wednesday, we got a look at full-month IPCA which showed annual headline inflation jumping 10.48% Y/Y. This wasn’t exactly a surprise. Mid-month we got a 10.3% print and the country has been stuck in stagflationary nightmare for the better part of 2015. Still, the number is “disquieting” (to use on of Goldman’s favorite adjectives for abysmal data out of Brazil).
Here’s Goldman’s take on Wednesday’s data:
IPCA inflation accelerated to a higher-than-expected 1.01% in November, up from 0.80% in October and 0.85% in the mid-November IPCA-15. Annual headline IPCA inflation accelerated to 10.48% yoy, up from the October 9.93% full-month IPCA reading.
Inflation has admittedly been under pressure from the large increase in a number of administered prices, but we stress that despite the ongoing recession and labor market deterioration, inflation in the set of freely determined prices is tracking at a high 8.3% yoy (up from 6.7% in December 2014) with services inflation sticky above 7.5% for four consecutive years.
We expect annual headline inflation to end 2015 in double digits (10.6%).
In short: inflation is at 12-year highs just as GDP is collapsing and unemployment is soaring.
As we've documented extensively, Copom's hands are tied. When you've got double-digit inflation, you can't very well cut rates to boost the economy especially when the full effect of the BRL's decline hasn't yet worked its way through to prices.
In fact, today's IPCA print virtually ensures a hike in January and probably another in March. "Above-est. CPI released today reinforces expectations that BCB will need to resume rate increases to take Selic to 16.25% from current 14.25%," Daniel Weeks, chief economist at Garde Asset Management, told Bloomberg via phone.
What could be better? Collapsing GDP, double-digit inflation, rising unemployment, an intractable political crisis, and double-digit interest rates. This isn't even a "sub"merging market anymore. We're back to "frontier" status in Brazil.