Brazil's retail consumption may continue falling

Brazil's retail sales for May surprised on the downside, contracting 0.9% m/m sa (-4.5% y/y) from a downwardly revised 0.5% drop in April (previous: 0.4%) and accumulating a drop of 2.0% year-to-date. The broad retail sales index, which includes auto & building materials, experienced an even larger contraction, of 1.8% m/m sa (-10.4% y/y).

Barclays highlights the sector-wise performance of Brazil's retail sales,  include the contraction in supermarket sales (-1.1% mm/ sa) and the third consecutive drop of furniture & appliances sales (-2.1% m/m sa), whereas apparel sales rose 2.7% m/m sa. Auto sales were 4.6% m/m sa lower during May, meanwhile construction materials sales contracted 3.8% m/m sa - both these results explain the disappointing performance of the broad retail sales.

"A recovery of retail sales may take time, and the labor market deterioration should continue for the next few quarters, and the fall in real disposable income this year should drive household consumption to a contraction of 1.2% in 2015. Moreover, consumer sentiment remains in the doldrums and the tightening of monetary conditions does not support the credit market", says Barclays.

Monetary-policy wise, analysts believe today's print reduces the likelihood of a final September hike in the Selic rate. For the July 29 meeting, however, the official communication of the central bank still downplays the risks for growth in contrast to a worrisome inflation outlook. Given the timid move in 2016 inflation expectations and the recent upside surprises in inflation since the previous meeting, Barclays assumes the most likely outcome is a 50bp hike, consistent with the information presented in the latest Quarterly Inflation Report.