Weekly Report 116
Following mixed data throughout the week, the U.S. Nonfarm Payrolls report surprised to the upside, reinforcing the view of a still resilient labor market. The Payrolls recorded the creation of 139,000 jobs in May, above market projections (126k). The breakdown showed a slowdown in private sector job creation, while wages doubled at the margin, indicating stronger pressure compared to previous months. Thus, in contrast to the weaker figures seen in the ADP report, Payroll reinforced the narrative of a labor market decelerating at a more moderate pace, strengthening the case for Fed Funds rate cuts only starting in September.
Another relevant event this week was the announcement to raise tariffs on steel and aluminum imports from 25% to 50%. In the ongoing negotiations, the United Kingdom was exempted from the new measure, while Mexico and China condemned the increase. It is important to note that the measures also impact Brazil, which, as one of the United States’ largest trade partners in steel, is expected to seek measures to secure an exemption or compensatory alternatives.
In Brazil, the week was marked by political negotiations surrounding alternatives to the IOF tax increase, which are set to be discussed by party leaders this Sunday. On Tuesday, there was an expectation from the Ministry of Finance to announce measures to compensate for the IOF increase. However, the announcement was postponed to next week, as the presidents of the House and Senate decided to wait for alignment with other party leaders before moving forward with any definition.
Public opinion polls have shown a consistent decline in the government’s approval—driven by the IOF issue and, more notably, the INSS scandal. This led the government to announce new quasi-fiscal initiatives, presented by President Lula in a press conference. In this way, the government’s current approach reinforced the view outlined by Moody’s, which revised Brazil’s sovereign rating outlook from positive to stable, reflecting slower-than-expected progress in building fiscal policy credibility and spending discipline.
Finally, External sector data for May reinforced the perception that full-year numbers may fall short of market expectations. Low commodity prices have prevented stronger export values, while resilient activity—according to labor market data—has kept import levels elevated. Therefore, we believe the Central Bank’s goods trade surplus will reach around USD 58 billion this year—below the Focus survey’s current projection of USD 75 billion.
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