Brazil’s economic growth slows

Brazil's real fell to a one-week low and yields on interest-rate futures contracts dropped after reports showed the nation's economic growth was slower than forecast.

Traders are projecting that central bank President Alexandre Tombini will reduce the target lending rate to as low as 7.75 per cent by the end of August, the futures yields indicate. The real fell for a third straight month in May, its longest losing streak since February 2009.

“The economy is stuck,” Italo Lombardi, a Latin America economist at Standard Chartered Bank, said by phone from New York. “The GDP data reinforce the trend of the central bank to cut rates.”

The real declined 0.9 per cent to 2.0401 per US dollar after touching 2.0447, the weakest level since May 24. It fell 2.6 per cent this week and 6.5 per cent in May. Yields on the interest-rate futures contract due in January 2014 fell 4 basis points, or 0.04 per centage point, to 8.23 per cent, extending their weekly decrease to 29 basis points.

Brazil's economy expanded 0.2 per cent in the first quarter from the previous three months, compared with the 0.5 per cent median forecast of economists surveyed by Bloomberg. Gross domestic product grew 0.8 per cent from a year earlier, falling short of the 1.3 per cent median projection.

The worsening global outlook and speculation that Brazil's central bank will make deeper cuts in borrowing costs helped drive the real's depreciation, according to Lombardi.

Slowdown in China:

“We had a wave of risk aversion abroad, above all related to China,” Lombardi said. “If this trend of a slowdown in China becomes clearer, this could affect exports and have a negative impact on flows, not just commercial, but financial flows.”

China’s Purchasing Managers’ Index fell to 50.4 in May, the National Bureau of Statistics and the China Federation of Logistics and Purchasing said. The reading compares with the median estimate of 52 in a Bloomberg News survey of economists. A reading above 50 indicates expansion.

US payrolls climbed by 69,000 last month, the fewest in a year, Labour Department figures showed. The median estimate was for a 150,000 advance. The jobless rate increased to 8.2 per cent from 8.1 per cent.

The real rallied 1.8 per cent last week as the central bank auctioned currency swaps to curb its drop. The swap sales were a reversal from April's policy of stepped-up dollar purchases aimed at weakening the currency to help exporters. The central bank bought $7.2 billion in the spot market in April, the most since purchases of $8.4 billion in March 2011.

Lower borrowing costs:

Central bank President Alexandre Tombini cut the target lending rate by a half-percentage point to a record low 8.5 per cent this week, citing in a statement “fragility” abroad that is having a “disinflationary” effect on Latin America’s biggest economy.

Growth will accelerate to a 4 per cent to 4.5 per cent pace in the second half of the year, Finance Minister Guido Mantega told reporters. The economy will grow faster in the second quarter than it did in the first.

Weaker-than-expected GDP as well as a drop in economic activity reported last month indicates “the country could grow less than 3 per cent in 2012,” Enestor dos Santos, senior Brazil economist at Banco Bilbao Vizcaya Argentaria SA in Madrid, wrote in a note to clients today.

“In this environment, the announcement of more measures to support growth should not be seen with surprise,” he wrote. Dos Santos said his previous estimate of 3.3 per cent growth in 2012 may be too optimistic.