This increases the risk that parliamentarians right across the political spectrum, not just Dilma and the PT party, end up paying at the next election for their perceived political failures.
In economic language, one would say that the marginal political cost of additional misery is now rising faster for the opposition than for Dilma herself (it is already about as high as it can get).
Last week produced at least three developments that suggest that a political turning point of sorts may indeed be taking place in Brazil.
• President of the Chamber of Deputies, Eduardo Cunha, an ardent opponent of Dilma, said his decision whether to push ahead with the process of impeaching Dilma has now been pushed to 2016. The reality is that Cunha himself is now under severe pressure.
• Parliament ratified Dilma’s vetoes on a number of extremely dangerous economic measures that, had the vetoes not been upheld, could have seriously destabilised the economy.
• Dilma publicly rejected a proposal to replace Finance Minister Joaquim Levy with former central bank governor Henrique Meirelles.
Whether Dilma continues to support her finance minister is, in our view, purely down to political expediency. Levy and Meirrelles would both pursue the same sensible policies; the only difference between them is their effectiveness in implementing these policies.
Rate lift set for December alongside headline inflation
Fed officials continue to insist on lifting rates in December. Both US stock markets and EM FX markets appear to have priced in the event. One important reason why the Fed might want to consider a rate hike now is that the US economy is about to experience a sharp rise in headline inflation due to base effects.
This base effect should be put into the context of the US business cycle. If the US economy achieves full employment and consumers start to spend a bit next year – both of which are entirely consistent with the latest labour force data and evidence of declining household debt-to-income ratios and declining negative housing equity rates – then inflation could obviously rise even further.
One particularly nasty challenge facing the Fed is that it will be tough to soak up, all the money that has been printed under its QE programme over the past few years in a hurry. This means that, barring a recession, there is a non-trivial risk that inflation expectations respond more than anticipated to rising headline inflation.