On Thursday, reports that the government might expand fiscal and quasi-fiscal measures rattled markets. The Brazilian real weakened by over 1% at its lowest point during the session, while yields on interest rate futures jumped by as much as 15 basis points—domestic-driven turbulence not seen since the political and economic turmoil of late 2024.

XP Investimentos macro strategist Victor Scalet noted that since the announcement of trade tariffs by Donald Trump on “Liberation Day,” local headlines had taken a back seat to global developments, especially due to strong foreign inflows. “But with idiosyncratic risks mounting in recent weeks, we’ve been watching for triggers that might shift the market narrative back to local factors,” he said.

Mr. Scalet added that despite a lack of concrete new measures, XP has been fielding an increasing number of inquiries from foreign clients regarding Brazil’s election cycle, fiscal risks, and inflation trajectory—a shift he called “unusual.”

“All of this made me wonder whether a mix of Trump stepping back on tariffs and foreigners already heavily exposed to Brazilian assets could be enough to turn the tide back toward local risks—a scenario we feared but weren’t expecting so soon,” he wrote on social media. “Let’s see how things evolve in the coming weeks, especially with domestic investors holding bullish positions despite a broadly bearish outlook. That could be a recipe for trouble.”

Olga Yangol, head of emerging markets research and strategy at Crédit Agricole, is cautious about betting on falling interest rates in Brazil. “Our forecast for the Selic to end next year at 13% is more hawkish than market consensus. As such, we don’t see the front end of the yield curve as particularly attractive. Nor does the long end appeal, given current fiscal concerns and an inverted yield curve,” she told Valor.

Former Treasury secretary Carlos Kawall, now a director at Oriz Partners, said the environment has become more challenging for Brazil, as two of the key justifications the Central Bank used to strike a more balanced tone in its most recent Monetary Policy Committee (COPOM) minutes—the slowdown in domestic and global economies—have lost traction.

“Brazil’s economic policy remains expansionary, and the slowdown anticipated in the minutes may be further off than expected,” Mr. Kawall said on his weekly podcast.

He noted that current initiatives, such as raising the income tax exemption threshold to R$5,000 and launching a new private payroll-deductible loan system, point to a softer cooling of the economy. “Last week, speculation emerged about potential new credit and fiscal stimulus measures—some already on the radar, such as subsidized cooking gas, electricity price relief, and a proposed increase of the Bolsa Família benefit to R$700. Even though the latter was officially denied, markets still view such measures as likely in an election year.

Against this backdrop, markets are closely watching the upcoming Bimonthly Revenue and Expenditure Report, scheduled for release on Thursday, for signs of the government’s fiscal stance.

Morgan Stanley expects the report to outline a spending freeze in the range of R$5 billion to R$10 billion. “It’s worth remembering that there are five such reports per year, used by the government to reassess revenue and expenditure forecasts in pursuit of its primary fiscal target—currently set at zero,” the bank’s economists wrote.

Analysts at TS Lombard say the scope of any new spending freeze could significantly influence market sentiment. “Any figure above R$20 billion would be seen as market-friendly. While there are rumors of a broader freeze in the range of R$30 billion to R$40 billion, we remain skeptical. Still, a cut of that magnitude would send a strong signal to investors and could help extend the recent rally in both the Ibovespa and the real,” said economists Elizabeth Johnson and Wilson Ferrarezi.

However, the market also sees downside risk in a potentially underwhelming fiscal response. “That’s because the Lula administration may be unwilling to implement meaningful spending cuts while approval ratings remain low. The modest rebound in public support seen in April may be reversed by the unfolding scandal in the government pension system,” they warned.

Emy Shayo Cherman, equity strategist for Brazil and Latin America at J.P. Morgan, noted that Brazil’s strong market performance in 2025 has been largely driven by global rather than domestic factors. “Brazil is shining, but not because of its own merit. The same fiscal issues that have haunted local markets and pushed up interest rates are still in play,” she said.

Even so, she acknowledged that Brazil has benefited from recent shifts in global dynamics. “It’s a tariff-resilient economy, assets are cheap, positioning is light, real interest rates are high, and corporate earnings have been solid.”