Fed signals hawkishness, Brazil's jobless crisis deepens as dollar soars

Kevin Warsh's speech at Jackson Hole on Friday afternoon was the external trigger Brazil did not need: by reaffirming the Federal Reserve's commitment to the 2% inflation target and signaling that the U.S. monetary authority still has "work to do," the Fed chair pushed the dollar to R$5.196 at the close — up 0.66% on the day and 1% on the week — and forced Brazilian futures rates higher across the entire curve. The DI contract for January 2035 ended the session at 14.61%, up 13 basis points, while bets on a Fed rate hike as early as September jumped to 57.5% according to CME Group's tool, versus a 42.5% probability of a hold. In New York, the index closed lower. In São Paulo, the Ibovespa held its ground: after swinging violently between 173,894 and 176,421 points, it ended up 0.30% at 175,665 points, driven by Petrobras, whose preferred shares rose 1.99%, notching an eighth straight session of gains and a weekly return of 2.71%. The bourse's resilience, however, does not erase the external noise: with the Central Bank already running simultaneous dollar buy-and-sell auctions to contain foreign outflows, and the external accounts posting the largest current-account deficit for any July in seven years, the external environment has turned more hostile precisely when domestic fragility was already flashing unmistakable signals.

Those signals came through forcefully in the July Caged data, whose result was the worst for the month since the series began in 2020: just 58,568 net formal jobs created, less than half the median estimate of 114,000 projected by financial institutions and consultancies polled by Valor. The number was accompanied by a procedural irregularity — the data was inadvertently posted on the Ministry of Labor's website roughly an hour before the official press conference, prompting acting minister Chico Macena to announce an investigation into the leak. Retail concentrates the most visible deterioration: net closures of 2,056 jobs in July and a cumulative loss of 7,896 positions on the year, while the other four sectors all posted positive balances. The combination of elevated interest rates — the Selic remains at 14% per year — with expensive credit and mounting competition from e-commerce is rapidly redrawing the map of Brazilian brick-and-mortar retail.

Delinquency confirms this diagnosis with historic numbers. The Central Bank reported that the default rate on non-earmarked credit reached 6.4% in July, the highest level in the series that began in March 2011. Among individuals, the figure climbs to 7.8%. Private payroll-deducted credit — a category that should be safer given its automatic payroll withholding — crossed the 10% delinquency threshold for the first time, ending July at 10.03%. It's a record within a record. FGV's Commerce Confidence Index fell 1.3 points in August to 84.2, and economists at the foundation warn that retail executives are pessimistic even on the eve of Black Friday and Christmas — the two dates that typically sustain sector optimism. Frederico Trajano, CEO of Magazine Luiza, summed up the moment bluntly before a retailer audience in São Paulo: hundreds of stores are shuttering overnight, he said, attributing part of the problem to the government's "electoral rush" on agendas that directly affect the sector.

The stress in retail finds an echo in the corporate headlines. Braskem, Latin America's largest petrochemicals company, received court approval on Friday to process its out-of-court restructuring, a mechanism aimed at reworking US$10.9 billion in debt — R$56.3 billion at current exchange rates — with a predominantly foreign creditor base. The government, which is closely monitoring the company's situation, renewed import tariffs on six types of plastic resins to shield the company from foreign competition while it negotiates its survival. Grupo Pão de Açúcar, meanwhile, faces a challenge from the São Paulo Public Prosecutor's Office to its out-of-court restructuring plan, with prosecutors arguing that the composition of the creditor group does not reflect adequate economic identity — an obstacle that the retailer warns could deepen its crisis if the plan is rejected. Habib's formally filed for judicial reorganization with R$265.2 million in debts, with Bradesco as the leading creditor holding roughly 40% of the exposure. And OSX, Eike Batista's shipbuilder, asked the Rio courts to grant judicial reorganization to the group, even invoking the cram down mechanism to override potential creditor resistance.

Against this backdrop, the government is moving in directions that at times reassure and at times unsettle markets. Planning Minister Bruno Moretti told the press that the 2027 budget proposal — to be presented to Congress in the coming days — projects an effective primary surplus of R$18 billion to R$20 billion, with a roughly 20% increase in discretionary spending over the current baseline. The number looks positive on paper, but the central government posted a surplus of just R$10.78 billion in July, and the inclusion of a R$6 billion capital injection into Correios — a company President Lula has ruled out privatizing and which the government refuses to leave to its own fate — raises questions about the consistency of the fiscal framework. Lula stated publicly that he is not worried about public debt, adding that fiscal responsibility "guides his life" — a phrase that seasoned markets learn to hear with caution. On the same day, the Supreme Federal Court formed a majority to tax Vale's profits earned through foreign subsidiaries — before Justice André Mendonça suspended the ruling pending Justice Fachin's vote — a decision with significant precedent-setting implications for all Brazilian multinationals with international operations.

Two cross-cutting themes deserve special attention for their strategic dimension. The first is the race for critical minerals: Vale CEO Gustavo Pimenta declared on Friday that critical minerals are "the new oil" and that Brazil is falling behind in the global race, while Lula pressed Senate President Davi Alcolumbre for urgent approval of regulatory legislation after identifying advancing foreign interest in four rare-earth projects in the country. The second is energy and data infrastructure: UCB Power and Jinko EES, the Brazilian subsidiary of China's JinkoSolar, signed a memorandum to nationalize energy storage systems; Alibaba's cloud arm announced two data centers in Brazil to expand its artificial intelligence footprint; and France's Voltalia obtained authorization to install a 322.5 MW data center at the Pecém complex in Ceará, with guaranteed tax breaks. Brazil's first battery auction, slated for December, is stuck on the question of who will foot the bill, and some already view a postponement as a foregone conclusion — a sign that political urgency does not automatically translate into execution.

In the week ahead, the market will track three vectors with particular attention: floor votes in the Chamber and Senate on the Move Brasil provisional measure, which frees up R$30 billion in credit for taxi and rideshare drivers; the joint committee's decision on the provisional measure eliminating the "blusinhas" tariff — a debate that simultaneously touches industrial employment and the cost of living for lower-income households; and the unfolding of the STF ruling on the taxation of Vale's foreign profits, whose outcome will have direct repercussions for Brazilian multinationals with international listings. At any moment, a new Warsh remark could reset the global mood.

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**Votorantim / Nexa Resources (NYSE: NEXA)** — Votorantim reached a deal to sell its 64.7% stake in Nexa to Sweden's Boliden in a share swap transaction that values Nexa at US$2 billion; Votorantim will become Boliden's largest shareholder, with 7% of the capital and a board seat. The transaction marks the Brazilian group's exit from direct control of a Latin American miner to become a relevant partner in a European company listed in Stockholm with a US$17 billion market cap.

**Braskem (NYSE: BAK)** — The courts on Friday approved the processing of Braskem's out-of-court restructuring, which aims to rework US$10.9 billion in debt, with foreign creditors accounting for the largest share; in parallel, the federal government renewed import tariffs on six categories of plastic resins to shield the company from foreign competition during the restructuring process.

**Flutter Entertainment (NYSE: FLUT)** — Betnacional, the only brand operated in Brazil belonging to a Wall Street-listed company — Flutter Entertainment — became the target of a joint operation by the Federal Revenue Service and the Federal Public Prosecutor's Office on suspicion of money laundering, evasion of foreign currency and tax evasion, with an initial estimate of R$300 million in taxes to be assessed against NSX, the group operating the platform in the country.