Brazil Retail Sales Surprise With Biggest Drop Since 2012

Brazil’s retail sales fell the most in more than two years in June, surprising analysts who forecast an increase. Swap rates declined.

Sales fell 0.7 percent after a revised 0.3 percent increase the prior month, the national statistics agency said today in Rio de Janeiro. That was below the median forecast for a 0.4 percent increase from 29 economists surveyed by Bloomberg, and below all but one analyst estimate.

Sales in June fell for the first time since April as Brazil began hosting the World Cup soccer tournament. Inflation breached the government’s target range in June after the central bank concluded the world’s longest rate-raising cycle. Analysts forecast the economy this year will post its slowest growth since the recession of 2009.

“Some World Cup effect is exacerbating the drop, but I think if we exclude the World Cup effect what you would see is that consumption is slowing,” Luciano Rostagno, chief strategist at Banco Mizuho do Brasil SA, said by telephone from Sao Paulo. “We weren’t expecting retail sales would be that weak. This reveals that consumption is losing steam in Brazil.”

Swap rates on the contract due January 2017 declined four basis points to 11.64 percent at 10:02 a.m. local time. The real appreciated 0.5 percent to 2.2712 per U.S. dollar.

Appliances, Food

Sales of appliances and furniture fell 2 percent, reversing 1 percent growth the prior month. Office equipment and materials slipped 4.2 percent after a 1.5 percent gain in May. Sales of food, beverages and tobacco at hypermarkets and supermarkets rose 0.6 percent after a revised 0.1 percent decline in May.

Policy makers boosted benchmark borrowing costs by 3.75 percentage points in the 12 months through April to damp consumer price increases. Today’s data will temper expectations of “aggressive” rate increases next year, according to Neil Shearing, chief emerging-market economist at Capital Economics Ltd.

“We could see a shift toward more dovish policy, or certainly more dovish language, from the central bank given that inflation has probably peaked now,” Shearing said by phone from London. “There’s a small possibility that they may cut rates at the next monetary policy meeting.”

Consumer Prices

Consumer prices rose 6.52 percent in the year through June, breaching the ceiling of the government’s target range, before moderating to 6.5 percent in July. The central bank targets inflation of 4.5 percent plus or minus two percentage points. The central bank’s next interest rate decision is Sept. 3.

Companies such as Whirlpool Corp. suffered as the monthlong soccer tournament distracted consumers, company President Michael Todman said on an earnings call July 23. The impact of the games plus October elections caused Todman to reduce his outlook for industry growth in the region this year. He said he is more optimistic in the longer run.

“We continue to believe that the macroeconomic indicators in Brazil points to long-term, healthy demand growth, as unemployment is at historically low levels,” Todman said.

Brazil’s unemployment rate was 4.9 percent in April, a record low for the month and the most recent data as a strike at the statistics institute impeded release of May and June data. The institute’s union agreed this week to end its strike.

Retail Sales

Retail sales in June rose 0.8 percent from last year, versus a median forecast for a 3.5 percent expansion. The broader retail index, which includes cars and construction materials, fell 6.1 percent from a year ago, versus a median estimate of a 2 percent decline.

“There’s an exhaustion of the consumption-based growth model,” Jankiel Santos, chief economist at Banco Espirito Santo de Investimento SA, said by phone from Sao Paulo. “We already saw this fluctuation in broader retail data, with car sales weighing heavily. Now we’re seeing it in the headline retail data.”

While Brazil’s government in July began phasing out IPI excise tax cuts for appliance sales, it extended through year-end the reduction for the purchase of vehicles. That preceded the central bank’s decision to reduce reserve requirements to free up an estimated 45 billion reais ($20 billion) for lending.

Brazil’s consumer confidence as measured by the Getulio Vargas Foundation rose in June for the first time this year, jumping again in July. By contrast, industrial confidence continued its slide to the lowest level ever recorded by the National Industry Confederation.

‘Technical Recession’

Economists surveyed by the central bank Aug. 8 reduced their 2014 growth forecast for the 11th straight week, to 0.81 percent. That would be less than one-third the 2.5 percent expansion posted last year.

Brazil is scheduled to release second-quarter growth figures at the end of this month, and today’s data increases the odds of a contraction, according to Banco Mizuho’s Rostagno.

“We have a real chance to see a technical recession in Brazil already in the second quarter,” he said. “If it doesn’t happen -- let’s say we don’t have a downward revision for the first quarter -- weak retail figures from June create bad momentum for the economy in the third quarter.”

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