So it's a lot. It's a huge sweep. The far right doesn't properly have, or they don't really have an economic plan as such for the country. But what they have been saying is that they will toe the same line that Milei has towed in Argentina. So they're positioning themselves as libertarians, as free marketeers, and as people who simply do not like big government, whatever that means. And this is why I think we can say to some extent that markets are happy today. I don't think that happiness is going to last, to be honest.
Welcome to Prof G Markets. I'm Ed Elson. It is October 6th. Let's check in on yesterday's market vitals. A rally in big tech drove the Nasdaq to a record high. The S&P 500 and the Dow also climbed. The yield on 10-year Treasuries hit its highest level since 2002. Brent crude dipped below $100 per barrel. And finally, Nvidia shares rose more than 2% to hit a record high. Okay, what else is happening?
Brazil's election just sent its stock market to a record high. The Ibovespa, Brazil's main stock index, jumped as much as 9% yesterday, making it the index's biggest intraday gain since April 2020. The real also rose more than 4% against the dollar, and it's now trading below five reais per dollar for the first time in about a year and a half. Now, what were they actually reacting to? Well, Lula, Brazil's left-wing incumbent, was projected to finish first, and every final poll had him ahead. Instead, Senator Flávio Bolsonaro, the right-wing candidate who is the son of former President Jair Bolsonaro, won 47% of the vote on Sunday. Lula won 45%. Neither candidate cleared 50%, though, meaning the two will now face each other in another election on October 25th. At the same time, the far right also achieved major victories in congressional and gubernatorial elections across the country. So here to break down what happened, we are speaking with Monica de Bolle, senior fellow at the Peterson Institute for International Economics. Monica, good to see you. Thank you for joining us on Prof G Markets. Let's just start from the very basics here because we haven't talked about Brazil in a long time. I guess the first question is, what happened in this election? What are the important things to be aware of, and then maybe we can get into the market's reaction.
Sure. So thanks for having me again. There are three things that are very important about these elections. So first of all, yeah, it was a presidential election, but more than that, it was also an election for governors in Brazil and an election for Congress. So really, it's an election with a three-part story. So there's the story of the presidential election, there's the story of what happened to the gubernatorial races, and there's the story of what happened to the congressional races. And all three stories are very compelling. The least compelling of them is actually the presidential race, because in the presidential race, there's nothing there that we didn't already kind of foresee.
Yeah. Tell us a little bit more about the presidential race here, because we obviously know the name Bolsonaro. His father is obviously pretty controversial. What did we learn about the presidential race so far?
So one thing is very important to keep in mind: both of those candidates, so both the current president Lula, who's running for reelection, as well as Flávio Bolsonaro, who is former President Jair Bolsonaro's son, both of them had very, very high rejection rates from the outset, at about 45%. So about 45% of voters who had been polled throughout the campaign were saying, we're not going to vote for either one of those candidates. So it's not really an election about who is favored or who the public likes the most. It's actually an election about who the electorate can stomach at this point, or who do they dislike the least. So it's important to contextualize that, because then when you look at the actual numbers and what happened, one important story here is that Brazil had, in the first round of the elections yesterday, the highest abstention rate that it has ever had in an election. It was at about 21 point something percent, so let's say 21%. That's 15% of the vote of the country that did not vote.
Wow. And in Brazil that's very high because voting and elections are mandatory. People have to vote. They do not have the option to opt out. And yet a fifth of the country did. So that already tells you a lot about what's going on in terms of voter sentiment in the country and how people actually feel about these candidates individually. How did Brazil end up in a place where the two options to be president are two people that a fifth of the nation have decided that they hate? I mean, that's pretty wild.
So this comes back to the extreme, really extreme. I don't even know if the word polarization fits anymore, but let's use it for now. So this all comes down to the extreme polarization that Brazil's been under. It's been like this for the last, well, this being the third, the last three elections. So back in 2018, we had an election between, not Lula, because Lula was in jail at the time, but the person who he appointed to be his successor against Jair Bolsonaro, and Jair Bolsonaro won that election. Then in 2022, Lula had been released from jail, and there was an election between Lula and Jair Bolsonaro, and Lula won that election. And now we're back to the same situation, a different Bolsonaro, but the same Lula running against each other. So it's almost like people have seen this movie over and over again, and it's kind of running on replay. And the reason is Brazilian politics at this moment does not have the bandwidth, because of polarization, to offer up any other candidate. The other options that came out and that ran in the first round of the elections, they were broadly rejected as well because they didn't even come to 3% of the total vote, the other candidates who are in the running. So at the end of the day, the only two recognizable names in Brazilian politics are Lula and Bolsonaro. And so it's yet another election that pits the two names against each other.
I mean, the situation sounds pretty terrible when you've got both of these candidates who have both of their own ties to corruption. You've got Lula who has his own history, and of course he went to jail himself. You've got Bolsonaro, who's the son of the guy who plotted a coup and got a 27-year sentence. But at the same time, investors are pretty happy about this. They're reacting to something. The stock market is up. It's actually been doing really well. The index is up 30% year to date. It's up 45% in the past year. So I guess we'll get into what's happened over the past year, but what exactly are they reacting to? Are they reacting to something better in terms of those gubernatorial races and that congressional race?
So exactly. This is where the story is much less about the presidential election than it is about what happened in the gubernatorial races as well as in the congressional ones. And there was a very clear story. So whereas in the presidential elections, the story is the same as it's been in the past several years, the story for Congress and governors is completely different. And there what we saw was a very clear win, practically a landslide, by the Brazilian far right represented by a party called the PL. That's the acronym. It stands for Liberal Party. But do not understand liberal in any terms that are recognizable to a US audience or even to a European audience. Liberal has a completely different connotation in Brazil. That is the far right party. They were able to elect 121 deputies to the lower house. That's the most any party has ever had in Brazil's democratic history. The house has 573 deputies. So they have quite a big chunk of that now, a little over 20%. In the Senate, they were able to grab a lot of seats. So currently the PL, the far right party, represents about a third of the Brazilian Congress, and they also managed to elect in the first round five governors, and two more are likely to win in the runoff. So they'll have seven governors out of 20-plus states in Brazil. So it's a lot. It's a huge sweep. The far right doesn't properly have, or they don't really have an economic plan as such for the country. But what they have been saying is that they will toe the same line that Milei has towed in Argentina. So they're positioning themselves as libertarians, so to speak, as free marketeers, so to speak, and as people who simply do not like big government, whatever that means. And this is why I think we can say to some extent that markets are happy today. I don't think that happiness is going to last, to be honest.
Yeah. Talk more about why the happiness won't last. I mean, it sounds like investors are saying, hooray, no regulation. But I guess our view on this podcast is that isn't necessarily always a good thing for business. Maybe you agree. Why do you think this won't last?
Yeah, I completely agree. So hooray, no regulation is not a good thing, especially in a country like Brazil. And hooray, we have the far right, and who's going to do all of these wonderful things and reform the country. Wait a minute. That's not exactly what's happening, because what's really happening here is that this party, the PL, the far-right party that has now conquered the Congress in this way as well as the gubernatorial races, they are just beginning their power consolidation. So the process by which they're going to consolidate themselves in power. A party in the process of consolidating itself, especially one that has a kind of authoritarian bent, if not an outright authoritarian bent, is a party that is going to spend to be able to stay in power in the way that they intend. So any plans for fiscal adjustment, bringing down the debt-to-GDP ratio, which in Brazil is very high, everything that the market imagines is going to be possible now, is really not a priority for these people because they've just come to power. And the first thing that they're going to want to do is to consolidate that power. And consolidation, power consolidation involves spending, not less spending, more spending.
Do you think that might be also what is being priced in, at least in the short term, as investors know that we're about to see this massive injection of spending from the fiscal side in Brazil, and those dollars have to go, those reais, excuse me, have to go somewhere. Presumably, it's going to go into Brazilian businesses. Of course, that's going to cause problems later down the line when it comes to fiscal sustainability and their debt-to-GDP, but at least in the short term, free money.
Well, there could be some of that going on, but I suspect it's much more a story of overt speculation at this point, when what markets are doing is much more speculative than anything else. Because in reality, this has been a campaign where there's been absolutely no discussion of major economic themes. It's almost as if Brazil had no economic problems whatsoever, which is certainly not true. And therefore, everybody is pretty much in the dark with respect to what Flávio Bolsonaro will do, but also with respect to what a reelected Lula would do. So there's really no reason for enthusiasm at this point. There's a great reason for caution on both sides. So I'm reading this movement that we're seeing as much more speculative than anything else.
Right. What is the national debate in Brazil really about at this point? What are the different factions fighting over, and to what extent does it map onto the national conversation in the US?
So it maps somewhat, but we need to be careful about these readings of Brazil as following in the steps of the US, because the contexts are completely different. I mean, they may sound kind of similar when you just look at them at a glance, but profoundly the context is not the same. And I think what is important to realize here is that the conversation in Brazil has really been all over the place because the country is in a major institutional crisis. There was just a massive, massive corruption scandal coming out of a financial institution that was closed by the central bank last year, was liquidated by the Brazilian central bank last year. And that particular scandal has had ramifications all over the place. In fact, it does affect Flávio Bolsonaro, the candidate who seems to have some involvement with this scandal, and he is under investigation. But what's happened recently is that the scandal reached the Supreme Court. There are some Supreme Court justices who have allegedly been involved with the banker, the owner of the bank that failed, and who is currently in jail and serving time for his financial crimes, and he's also under investigation for a bunch of other things. So really the conversation in the country has been about this massive institutional crisis and a constitutional one at that, given that it involves the Supreme Court. And really very little time has been devoted to thinking about what each of these candidates is going to do, what they're proposing to do, and how they're going to resolve this institutional crisis.
It seems as though you would argue that the nation of Brazil is headed into pretty dangerous territory at this point. We have the runoff election taking place in a little less than three weeks. I'd be interested to just get, as we wrap here, your prediction on what might happen there, but also just your thoughts on the future of Brazil, because your description is actually pretty concerning.
Yeah, I'm very worried. The country is in an existential place, so to speak. The runoff is sort of an existential election in a lot of ways because the Brazilian far right, especially the Bolsonarista far right, does have a project, let's put it like that, for the country, which has nothing to do with the institutions and the current constitution of Brazil, which today completes only 38 years. So just as a reminder, this is a really young democracy. It's less than 40 years old. And yet the Constitution is being contested. The Supreme Court is being contested. Its powers are being contested. All of this is coming from the extreme right. So the runoff vote between Lula and Flávio Bolsonaro, who represents that worldview, is really about what the country is going to be. What is Brazil going to be? Is it going to go back to its authoritarian route, back to a style of dictatorship that's not going to be too dissimilar from the military dictatorship that we had for 20-plus years and ended in 1985? Or is Brazil going to continue to be a democracy with weak institutions, yes, but a democracy nonetheless for some time yet? That is really what the runoff is going to be about. It's about two different projects, an authoritarian one versus a democratic one for the country at large. And this is not even making any judgments about what we think in terms of what the right does, what the left does. It's not about that. It's really about completely different worldviews and completely different, I would say opposing even, ways to think about Brazil going forward and going into the future.
Monica de Bolle is senior fellow at the Peterson Institute for International Economics. Monica, this was fascinating. Thank you.
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We're back with Prof G Markets. The September jobs report showed a labor market on shaky ground. The economy added just 29,000 jobs, and the unemployment rate rose to 4.2%. July and August were both revised down, pushing July's totals into the red. And wages grew just 3% from a year ago, the slowest pace since 2021. Meanwhile, US companies announced the fewest September job cuts since 2022, but they are not hiring either. Employers announced plans to hire just 90,000 workers in September, which is the weakest hiring intentions in 15 years. On Kalshi, odds of a Fed rate hike fell from 65% to 21% after the jobs report was released. Here to discuss the state of the labor market, we are joined by Kathryn Anne Edwards, labor economist and host of the Optimist Economy podcast. Kathryn, thank you for joining us on the show. Let's get into the jobs report here. 29,000 jobs, lower than expected. The unemployment rate went up. Overall, not a great report, it seems. What did you make of what we saw?
