Election euphoria masks Brazil's deepening economic deceleration crisis

The real closed Monday's session with a sharp gain, as the dollar retreated 0.74% to R$5.106 — and the move says a great deal about what is dominating investor thinking in Brazil right now. It wasn't monetary policy, nor the external backdrop, nor even the trade tension with Washington. It was the election. The prospect of a political turnover in October remains the main catalyst for local assets, compressing risk premiums and fueling an "election trade" that has distorted the reading of fundamentals. The Ibovespa advanced 0.74%, closing at 186,596 points, led by private bank stocks — BTG Pactual units rose 3.42% — while commodity-linked names traded in the red, with Vale losing 1.12% and Petrobras retreating more than 1% amid a drop of over 3% in oil prices. Interest rate futures fell sharply across the entire curve, with the January 2031 DI moving from 14.035% to 13.91%, reflecting both the favorable external environment and the bet that an eventual change in the Palácio do Planalto would bring greater fiscal discipline.

It is a bet, however, that coexists with a structural contradiction. While financial markets price in a horizon of reduced political risk, the day's economic data point to an economy that is already decelerating sharply — and analysts disagree on whether that is good news or cause for concern. Bradesco revised down its Selic projections, expecting the rate to fall to 13.25% by year-end after Copom cut rates to 13.75% last week while the Fed, in a symmetrical and opposite move, raised its rate to the 3.75%–4% range. The interest rate differential between Brazil and the United States, though narrowing, still keeps local assets attractive to foreign capital — but for how long, if the Brazilian economy continues to decelerate and the Fed signals a tougher stance?

CNI's Industrial Survey, released Monday, crystallizes this tension. Industry's investment intention index fell for the fourth consecutive month, hitting 51.3 points in September — the lowest level since August 2020, at the height of the pandemic. Installed capacity utilization slipped to 69%. Analysts primarily attribute the decline to electoral uncertainty, but the deeper diagnosis is that companies are operating in an environment of expensive credit and weakened demand outlook — and there are signs that credit is about to tighten further. Economists at Folha warn that a more pronounced slowdown in credit operations in 2027 could become the main drag on activity that year, in a scenario where 82% of Brazilian families are already in debt. A Sicredi study showing default rates 40% higher among sports bettors adds another layer to the problem: part of household credit is being channeled into sports betting rather than productive consumption.

The fiscal picture complicates the equation. The government projected that public debt could approach 90% of GDP in 2029, potentially exceeding that level if the public accounts outcome lands at the floor of the fiscal target. At the same time, the Executive is preparing a budget freeze for Thursday's bimonthly report, but plans to unlock funds to accommodate the 15% increase in Bolsa Família — announced less than a month before the elections and questioned by economists over its political timing — as well as fuel subsidies, pressured by the Middle East conflict. Finance Minister Dario Durigan insisted that the measure is within the budget and not electioneering, but institutional evidence accumulated on Monday makes that reading difficult: the STF reopened a case shelved two years ago in order to validate the adjustment, and messages analyzed by the Federal Police show that Daniel Vorcaro, owner of Banco Master, worked to keep Otto Lobo in the CVM presidency, saying he would speak with "his crowd" to secure the post — a revelation that lays bare the level of private interference over the capital markets regulator, and one that emerges just as STF Justice Flávio Dino had already ordered a review of the agency's rules on funds and money laundering in the wake of the Master case.

On the external front, President Lula escalated his tone against Washington by declaring that Brazil could invoke the Reciprocity Law against the United States if no agreement is reached on Trump's tariffs, which reach 37.5% for some sectors. On Friday, Brazil will formalize consultations at the WTO — a gesture described by the government itself as procedural, but which marks a more assertive posture. In parallel, Lula announced that Uruguay has ceded to Brazil part of its beef export quota to China, an emergency measure given that Brazilian meatpackers have already exhausted the national shipment quota for 2026. The relief, however, will be limited this year. In agribusiness, projections point to yet another record grain harvest in 2026/27, but the continued expansion of soy is encroaching on basic food crops — a tension that takes on political overtones in an electoral dispute where the cost of living is a central theme.

In the energy and natural resources sector, two moves of geopolitical relevance occurred simultaneously. Chevron took its first exploratory steps in the Foz do Amazonas basin, operating nine blocks acquired at auction in 2025, following Petrobras' discoveries in the region — while bp declared that it intends to make Brazil one of its top five oil and gas businesses in the world, with a focus on the Bumerangue and Tupinambá fields in the pre-salt Santos Basin. Petrobras CEO Magda Chambriard, meanwhile, anticipated that the company will include in its next business plan studies to pursue self-sufficiency in diesel refining. In infrastructure, the picture is less encouraging: at least R$204 billion in road, rail, port, and waterway projects promised by the Lula government for auction in 2026 will be inherited by the next president, while Rumo and the federal government remain without an agreement on the Malha Oeste rail concession, which expired in June with no resolution of the billion-real dispute.

For the days ahead, attention will focus on three vectors. Tuesday's Copom minutes should reveal the granularity of the debate over the next steps in interest rates, at a moment when the market is already pricing in two additional 25-basis-point cuts by December. The Executive's bimonthly report on Thursday will show how much the government is willing to freeze — and whether the fiscal space revealed reassures or alarms. And the advance of the electoral race will continue to be the variable that, more than any economic data point, is moving prices in Brazil right now.