Markets still complacent on fiscal problems and the ability of the Temer administration to pass essential pension fund reform.
With a mere 11 weeks left until the yearend legislative recess - part of which will be focussed on Temer's fight for political survival - even the passage of uncontroversial micro reforms will be challenging. Furthermore, the timeframe for other important legislation to be passed next year is too narrow, too, since key members of Temer's cabinet must resign by early April if they want to run for elected office. Fiscal austerity bills are also on the back burner, putting next year's primary deficit target in jeopardy. Furthermore, even those politicians who recognize the urgency of passing unpopular reforms - such as the overhaul of the pension system - are more likely to opt to postpone the tough reforms until after the election.
Temer hangs on but no reform is past. The fiscal situation continues to deteriorate rapidly and markets finally wake up to the problem. 10y yields rise from 9.73% at the time of writing to 11.34% 12 months later.