Brazil’s June Industrial Output Sends Swap Rates Plunging

Brazil’s industrial output rebounded in June at a pace slower than economists had forecast after three straight months of declines, casting doubt on the strength of a recovery in the world’s largest emerging market after China and pushing swap rates down.

Industrial production rose 0.2 percent in June, the national statistics agency said today in Rio de Janeiro. Economists had expected output to increase 0.8 percent from the previous month, according to the median forecast in a Bloomberg survey of 41 analysts. Output fell 5.5 percent from a year ago.

“We’re going to have to wait for new numbers to truly consolidate a scenario of industry recovery,” Luciano Rostagno, the chief strategist at Banco WestLB do Brasil SA, said in an interview by telephone from Sao Paulo. “We can’t yet say that, because growth was very weak after three months of falling.”

President Dilma Rousseff’s government has cut taxes on manufactured goods, pressured commercial banks to lend more, and reduced the benchmark interest rate to a record low to boost flagging growth in Latin America’s biggest economy. The government has also sought to weaken the real, which has declined 9.2 percent this year, boosting prospects for exporters and helping shield domestic producers from cheap imports.

Weaker than expected industrial production figures indicated the central bank may have more leeway for additional cuts to its benchmark Selic rate in August. Swap rates on the contract maturing in January 2014, the most traded in Sao Paulo today, fell 9 basis points to 7.76 percent at 10:36 a.m. local time. Brazil’s central bank has reduced the Selic rate 450 basis points since August to 8 percent.

The real strengthened for the first time in four days, rising 0.57 percent to 2.0441 per U.S. dollar.

Government Stimulus

Output in June rose in 12 of 27 sectors, led by a 3 percent jump in vehicle production, 12.5 percent surge in transportation equipment and 8.6 percent jump in production of pharmaceuticals. Capital goods production, a barometer of investment, climbed 1.4 percent, reversing a 1.8 percent decline in May.

Car sales, a mainstay Brazilian industry, jumped 16 percent in June from the year before after falling on a yearly basis for four straight months. In May, the government reduced taxes on the purchase of vehicles and other manufactured goods in a bid to avoid dismissals.

The tax cut is scheduled to expire on Aug. 31, and the government has no plans to extend it, Finance Minister Guido Mantega said yesterday. So far, manufacturers have been living up to their pledge to avoid firing workers, anticipating a pickup in economic growth in the remainder of the year, he said.

Car Sales

July car sales will set a record for the month, Luiz Moan, institutional affairs director for the Brazilian unit of General Motors Co., said yesterday to reporters in Brasilia.

Jose Francisco de Lima Goncalves, chief economist at Banco Fator SA, said in an interview that demand for new vehicles may be approaching its limits regardless of the tax breaks.

“It could be necessary to have another round of real income growth in order to increase sales,” Goncalves said by phone from Sao Paulo.

June industrial production growth was not the product of government stimulus, nor does it signal a greater rebound, said Daniel Snowden, an emerging markets analyst at Informa Global Markets.

“I don’t really think it’s going to be indicative of a wider trend, maybe more of a leveling off,” Snowden said by phone from London. “We might bump along the bottom near zero for a few months before things finally begin to pick up in the final quarter of the year.”

Brazil’s economy expanded at an annualized rate of 0.8 percent in the first quarter, half the pace of the U.S., and economists surveyed by the bank forecast growth of 1.9 percent this year.

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