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The July unemployment rate was at 7.5%, 2.6bp higher than a year ago, a surprisingly strong pace of deterioration of labor market conditions in Brazil. In seasonally adjusted terms, the unemployment rate jumped to 7.2%, from 6.5% in the previous month, the largest monthly increase of the series.
The increase in the unemployment rate was caused by a higher number of unemployed people at the same time that the active labor force also rose. This means that more people continue to start looking for jobs, but are not able to find them. This excess supply of labor reflects on the wage dynamics in real terms it declined by 1.7% y/y. Together with the 0.9% drop in employed people, it translates into a real wage bill 2.6% lower in the month.
Today's release crystallizes the central bank dilemma on one hand, the exchange rate was weaker by 11.5% since the beginning of July and the loose fiscal policy position threatens the anchoring of inflation expectations and argues for a vigilant approach to monetary policy. On the other hand, the swift deterioration of the labor market and growth perspectives tempts a more dovish stance, backed by the monthly deceleration of inflation prints throughout this third quarter.Standing between a rock and a hard place, it will be vital for the Copom to communicate to market observers regarding the monetary policy strategy and conditionals for any change in interest rates.
"Despite today's print, most likely the board will maintain a hawkish stance, still focusing on 2016 inflation prospects. We stand by our view that the Copom is done with the hiking cycle, and that any upcoming easing would only come by the end of Q1 16", says Barclays.
