Industrial output crashes to 2014 lows as Brazil juggles rate cuts and fiscal crisis.

Today's expected rate cut by the Copom — the first since the outbreak of the war in Iran forced the Central Bank to interrupt its easing cycle — comes at a moment of rare convergence between favorable data and structural pressures that make every step forward politically and economically delicate. The market has fully priced in a 25 basis point cut to the Selic, to 14% per year, according to Folha de S.Paulo, but traders' real focus is not on the decision itself, but on the statement: whether the Copom will signal a pause in September, another cut, or keep all options open. It is precisely this ambiguity that sets the tone for markets this week.

The backdrop surrounding the meeting is one of mounting tension between activity that is beginning to show signs of fatigue and a fiscal situation that continues to deteriorate at a worrying pace. Industrial production posted its worst decline since 2014 in June, according to Valor Econômico, closing the second quarter with two consecutive months of losses after a relatively robust start to the year. The figure was a negative surprise and, in isolation, would reinforce the case for continuing the cutting cycle. The problem is that the fiscal backdrop refuses to cooperate.

Public debt has returned to the level observed during the Covid-19 pandemic, and allies of President Luiz Inácio Lula da Silva — in an election year — have begun publicly pressing him to commit to preserving a fiscal framework in a potential fourth term, according to Folha de S.Paulo. The Executive Secretary of the Ministry of Planning, Guilherme Mello, sought to allay concerns by stating that the economic measures announced by the government this year have "limited" impact on inflation and fiscal targets — but the statement itself reveals the degree of internal discomfort with market perception. The latest Focus survey brought the first reduction in Selic projections since March, with economists now expecting a rate of 13.75% at year-end, versus 14% the previous week — a sign that the window for additional cuts is opening, but cautiously and conditional on fiscal adjustment.

Added to this scenario are two external variables that pressured the currency throughout the week. The dollar closed at R$5.133 on Tuesday, up 0.90%, pressured by tensions in the Middle East — negotiations between Washington and Tehran over the reopening of the Strait of Hormuz remain unresolved — and by fears of new American sanctions against Brazilian officials. The diesel subsidy created by the government to contain fuel price increases since the start of the conflict has already cost R$7.03 billion, according to ANP, feeding a contradiction that fiscal analysts have found hard to ignore: the government demands fiscal credibility while simultaneously expanding parafiscal spending to contain the effects of an external supply shock.

Tax reform, in turn, has added a complication of a different order. The IBS Steering Committee published a resolution estimating the reference rate of the new system at 27.91% — above the 26.5% ceiling provided for in the regulation, according to Folha de S.Paulo. The figure, though a projection for post-2033, reignites the debate over the true cost of the transition and reinforces critics' thesis that the exceptions granted during the political negotiation of the reform will ultimately raise the aggregate tax burden, contradicting the original goal of simplification without tax increases.

In the corporate universe, second-quarter earnings season offered a sharp divide between the sectors that manage to navigate the high-rate environment and those being consumed by it. Itaú Unibanco, whose ADRs trade on the NYSE under the ticker ITUB, reported recurring net income of R$12.4 billion, up 7.8% year-on-year, with an ROE of 24.3% — a level that analysts at XP, Goldman Sachs, Morgan Stanley and Bradesco BBI described as solid and difficult to replicate in the sector. The bank cut its guidance for services and insurance revenue growth for 2026 — from 5%-9% to 2%-5% — but the adjustment had already been flagged in prior analyst meetings and caused no material surprise. The credit portfolio reached R$1.52 trillion, growing 9.6% over 12 months. On the other end, Bradsaúde plunged 11.49% after a loss ratio of 83.8% in the quarter — up 4.7 points sequentially — though part of the result reflects pent-up medical demand from the first quarter, a period distorted by an early Carnival. Gerdau, whose shares are also listed on the NYSE, surprised positively with adjusted net income of R$1.5 billion, up 69.7% year-on-year, benefiting from anti-dumping measures in Brazil and Mexico, a move that also boosted parent company Ternium, which posted a 60% jump in profit to US$344 million.

In the automotive sector, Fenabrave data showed registrations jumping 15% in July versus the same month of 2025, reaching 279,600 units — a robust figure that contrasts with the fall in industrial production and suggests that consumer credit, though costly, still exerts some pull on durable-goods purchase decisions. The phenomenon is partly explained by the market itself: new car prices are beginning to fall in Brazil for the first time in years, pressured by the aggressive pricing strategy of Chinese automakers. BYD reinforced this dynamic by launching the Song Pro Flex, a hybrid SUV developed specifically for the Brazilian market after a R$150 million investment in the flex fuel system — a sign that Chinese manufacturers have moved beyond being opportunistic entrants and are building local industrial roots.

Embraer, listed on the NYSE as ERJ, capped its week with two major moves: the signing of a contract to sell two KC-390s to the Colombian Air Force — the first Latin American country besides Brazil to acquire the military cargo aircraft — and the announcement by BNDES of financing of up to R$3.7 billion for the export of up to 19 jets to Canada's Porter Aviation. In parallel, Eve, Embraer's subsidiary focused on urban air mobility, completed the first flight of the transition phase of its flying car, with delivery scheduled for 2028. Latam Brasil, in turn, announced eight new routes aboard the Embraer E2s ordered under a US$2.1 billion deal — the first phase of the operation runs from November of this year to March 2027.

Looking ahead, investors will need to monitor three vectors simultaneously: the Copom statement and the degree of openness the committee signals for September; the evolution of negotiations between Washington and Tehran, whose outcome will determine both the price of oil and currency pressure on the real; and the electoral calendar, which is beginning to distort fiscal incentives in an increasingly visible way. The Genial/Quaest poll showed a narrowing of Lula's lead over Flávio Bolsonaro — from 12 to 9 points in the first round and from 8 to 5 in the runoff — and financial markets, according to Valor Econômico, tend to react positively to the prospect of an alternation perceived as more aligned with fiscal discipline. That electoral data point, combined with the deterioration of public debt and pressure on the tax rate ceiling, suggests that the coming months will bring an acceleration in the adjustment of expectations.

**Itaú Unibanco (NYSE: ITUB)** — The bank reported recurring net income of R$12.4 billion in the second quarter, up 7.8% year-on-year, with an ROE of 24.3% and a credit portfolio of R$1.52 trillion — above the top end of guidance. The bank also completed the sale of its retail operations in Colombia and Panama to Banco de Bogotá for approximately R$2.5 billion, consolidating its strategic focus on Brazil and select Latin American markets.

**Embraer (NYSE: ERJ)** — The manufacturer signed a contract to supply two KC-390s to the Colombian Air Force, opening the Latin American market for the military aircraft, which has already been selected by 13 countries, including Portugal, Hungary, the Netherlands and the United Arab Emirates. BNDES simultaneously approved financing of up to R$3.7 billion for the export of up to 19 jets to Canada's Porter Aviation Holdings.

**Gerdau (NYSE: GGB)** — The steelmaker posted adjusted net income of R$1.5 billion in the second quarter, up 69.7% year-on-year, benefiting from anti-dumping measures in Brazil and Mexico and from volume growth; the board approved an advance dividend payment related to fiscal year 2026.