Brazil Retail Sales Drop Most Since March 2010, Reinforcing Rate Cut Bets

Brazil’s retail sales in August fell the most since March 2010, providing further evidence that growth in Latin America’s biggest economy is slowing. Yields on interest-rate futures fell.

August sales fell 0.4 percent, more than the median forecast of a 0.1 percent decline in a Bloomberg survey of 34 economists and compared with a revised increase of 1.2 percent in July. Sales rose 6.2 percent from a year ago, the national statistics agency said.

Traders are betting that the central bank will cut its benchmark interest rate half a point to 11.5 percent at its Oct. 18-19 policy meeting, according to Bloomberg estimates based on interest rate futures yields. The retail number reinforces that view, said Enestor Dos Santos, senior Brazil economist for BBVA in Madrid, who forecasts a half-point cut.

“You have this sense that domestic demand is finally weakening, and we still don’t have the impact of the crisis in this number,” Dos Santos said in a telephone interview. “It’s consistent with the central bank’s view that the economy is moderating, and it’s going to get worse.”

Central bank President Alexandre Tombini last week said that “moderate” cuts in borrowing costs will help shield the economy from the European debt crisis, without compromising the inflation target.
Yields Fall

The yield on the interest rate futures contract maturing in January 2013, the most traded in Sao Paulo today, fell two basis points, or 0.02 percentage point, to 10.47 percent at 10:51 a.m. New York time. The real was virtually unchanged at 1.7627 per U.S. dollar.

Sales of clothing and textiles fell 2.8 percent in August, while furniture and electrical goods sales fell 0.4 percent. The broader retail index, which includes the sale of cars and construction materials, fell 2.3 percent after a 0.1 percent decline in July.

Sales of items that are sensitive to credit, such as vehicles and electrical goods, underperformed goods such as fuel and supermarket products, which are more sensitive to changes in income, said Flavio Serrano, senior economist at Espirito Santo Investment Bank in Sao Paulo.
Vehicle Sales

The 4.6 percent drop in sales of vehicles and auto parts shows that the central bank’s measures to curb credit growth, introduced in December, are finally having an impact, Serrano said in an e-mailed report.

The world’s second-biggest emerging market will expand 3.5 percent this year, according to a central bank survey of about 100 economists published yesterday, down from 7.5 percent in 2010. Brazil will grow more slowly than China, India and Russia this year and in 2012, the International Monetary Fund forecasts.

Industrial output contracted in August for the third time in five months. Business confidence in the third quarter fell to its lowest level in more than two years.

Consumer prices rose 7.31 percent in the year through September, exceeding the 6.5 percent upper limit of the central bank’s target range for a sixth straight month. The bank targets inflation of 4.5 percent, plus or minus two percentage points.

Tombini surprised analysts Aug. 31 by slashing the benchmark Selic rate half a percentage point to 12 percent, citing a “substantial deterioration” in the global outlook. The move come after President Dilma Rousseff vowed to take Brazil on a “new pathway” of lower borrowing costs, fueling speculation that policy makers were being pressured.

Rousseff has since reinforced her calls for monetary easing, saying last month that Brazil can’t miss the opportunity provided by a global financial crisis to cut rates further.

Brazil jumped to first place, from fifth in 2010, in a study of top global markets for retail expansion in a study published in July by management consulting firm A.T. Kearney.