Brazil Rate-Futures Yields Drop After Industrial Output Trails Estimates

Yields on Brazilian interest-rate futures contracts fell a second day after a report showing industrial output dropped the most in three years fueled speculation policy makers will make a deeper cut in benchmark borrowing costs at today’s monetary policy meeting.

The yield on the contract due in January fell 12 basis points, or 0.12 percentage point, to 8.89 percent at 12:52 p.m. in Sao Paulo. The real weakened 0.7 percent to 1.7714 per U.S. dollar, from 1.7584 yesterday. It earlier touched 1.7737, the weakest since Jan. 18.

Futures yields plunged as more traders bet the central bank may cut the benchmark Selic rate by as much as 75 basis points today after Brazil’s industrial output fell 3.4 percent in January from a year ago. Economists had expected a decrease of 1.4 percent, according to the median forecast from 43 analysts surveyed by Bloomberg. Output fell 2.1 percent from the previous month, the national statistics agency said today, the biggest decline since December 2008.

“Definitely the numbers are influencing the drop” in rate-futures contracts, Alessandra Ribeiro, an economist with Tendencias Consultoria Integrada, said by phone from Sao Paulo. “It creates the perception that industrial production could push the Copom to make a bigger cut in the benchmark rate.”

Traders are anticipating central bank President Alexandre Tombini will reduce the Selic rate by as much as 75 basis points today to 9.75 percent, according to rate futures yields. Brazilian policy makers trimmed benchmark borrowing costs by 50 basis points in January to 10.5 percent, bringing the rate down 200 basis points since August.

‘Moderate Adjustments’

While bets on a 75 basis-point cut today have surged in the past week, most economists are expecting a smaller reduction, with 59 out of 62 analysts in a Bloomberg survey forecasting another half-point decrease in line with the bank’s repeated pledge to deliver “moderate adjustments” to shield Brazil from Europe’s debt crisis.

“The market is still divided on Copom and at this moment any information has an impact,” Mauro Schneider, an economist with Banif Corretora, said by phone from Sao Paulo.

The real reversed an early gain amid reports the government may take further steps to weaken the currency.

The government may reduce the maturity of short-term trade loans backed by export contracts, known as ACC, from 360 days currently, Valor Economico newspaper reported today, citing government officials it didn’t identify.

Credit Lines

Some companies are using these credit lines to take advantage of lower domestic interest rates, Sao Paulo-based Valor said. The government may also impose a tax on loans from companies outside Brazil to subsidiaries in the country, Valor said.

The real has lost 2 percent since the beginning of February, when the central bank resumed intervening in the currency markets to stem the currency’s gains.

Finance Minister Guido Mantega said on a conference call with reporters yesterday that Brazil would maintain a weaker currency to offset the European debt crisis and slowing global growth.

“The market is following the price that the central bank and Mantega want,” Reginaldo Galhardo, head of currency trading at Treviso Corretora de Cambio, said by phone from Sao Paulo. “Mantega said he has an arsenal of measures and he didn’t say what they were.”

To contact the reporters on this story: Josue Leonel in Sao Paulo at jleonel@bloomberg.net; Gabrielle Coppola in Sao Paulo at gcoppola@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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