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.