UPDATE 2-Brazil retail sales fall unexpectedly in May
* Sales volumes drop 0.8 pct despite forecast for 0.6 pct rise * Building materials, appliances retreat after strong growth * Interest rate futures show growing bets on more stimulus By Brad Haynes SAO PAULO, July 11 (Reuters) - Brazilian retail sales fell unexpectedly in May, posting their biggest monthly drop since the 2008 financial crisis and eroding one of the few recent drivers of growth in a stagnating economy. Retail sales volumes fell 0.8 percent from April , government statistics agency IBGE said on Wednesday, defying forecasts for a 0.6 percent rise. Retail sales in Latin America's biggest economy have not fallen so much in a month since a 1.3 percent decline in November 2008. The sudden retreat in consumer demand reflects possible cracks in Brazil's retail and service sectors, crucial pillars of an economy that has been buoyed in recent years by its growing consumer class. As investment and industrial output wanes, President Dilma Rousseff has bet big that sustained consumer demand would help avoid recession. The country's economy has all but stalled in recent quarters. But Brazilian households are struggling with record debt levels. If they keep up their newfound thrift, it could weigh further on an economy already expected by the central bank and independent analysts to barely surpass 2 percent growth in 2012. The retail slowdown may also add momentum to a string of aggressive interest rate cuts. The central bank is expected to reduce its benchmark rate to a record low of 8 percent later on Wednesday. "The slipping retail sales should leave the central bank comfortable to continue cutting rates," said Luciano Rostagno, chief strategist at WestLB bank in Sao Paulo. Yields on Brazilian interest rate futures fell across the board on Wednesday, reflecting increased expectations for more monetary stimulus. The yield on the contract due at the end of 2013, the most actively traded early in the session, fell to 7.70 percent from 7.75 percent on Tuesday. The weak May retail numbers fell short of all 14 estimates in a Reuters poll, which ranged from a 0.3 percent drop to a 1.0 percent increase. The retreat followed solid expansion earlier in the year, which lifted sales volumes 8.2 percent from May 2011, and left economists hesitant to forecast a new trend in the months ahead. "Whether this is simply an accommodation after a very strong first quarter, or a sign that the consumer engine started sputtering remains to be determined," former central bank board member Alexandre Schwartsman wrote in a note. Record-low borrowing costs and a flurry of tax breaks from the Rousseff administration may continue to support domestic demand, he added. But the breakdown of the IBGE's data showed some of the very targets of the stimulus fell the hardest, suggesting limits for the focused measures amid the backdrop of consumer fatigue. Sales of home appliances, which jumped after a tax break on white goods in December, dropped 3.1 percent in May from April. Building materials, which have boomed on the back of government housing subsidies, plunged 11.3 percent in May as new housing starts retreated because of weaker demand. Five of 10 retail categories tracked by IBGE showed a drop in sales volumes in May. IBGE also revised downward April's retail sales growth to 0.7 percent, compared with a previously reported 0.8 percent.
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