Looking for good news today? Try Brazil

06/29/2010 10:30 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Good news out of Brazil today, June 29. (Yes, Virginia, there is good news somewhere.)

I know. I know. The Brazilian stock market is taking it on chin this morning on worries about slowing growth in China. What do you expect? China is a huge export market for Brazil. If growth in China falters, Brazilian companies such as iron ore exporter Vale (VALE) will see revenue plunge. Futures on Brazil’s Bovespa stock index were down 1.7% as of 8:30 a.m. ET.

So where’s the good news?

It comes from the inflation front.

The IGP-M index, Brazil’s broadest measure of inflation, rose at a slower rate in June than in May. The index was up 0.85% in June from May. That’s slightly above the consensus forecast of 0.8%. But it’s well below the 1.19% increase in May from April. That’s a strong indication that the central bank’s aggressive series of interest rate increases is working to slow inflation.

Much of the increase in inflation in both May and June, as well as the moderation in June, came from a 50% increase in iron ore prices in May. Iron ore prices rose another 23% in June.

Inflation at the consumer level, however, fell with consumer prices declining 0.18% in June.

The index as a whole was up at an annual rate of 5.17% in June. That’s down from the 5.22% annual rate in May, but it’s still above the central bank’s 4.5% inflation target for 2010.

The slight decline in the inflation rate in June won’t be enough to stop the Banco Central do Brasil from raising interest rates again at its July 20-21 meeting, according to a central bank survey of 100 economists. The consensus is looking for an increase in the benchmark Selic interest rate to 11%

The Banco Central has raised rates twice this year to a current 10.25% from a record low of 8.75% in March in order to slow economic growth and inflation. The Brazilian economy grew at an annual rate of 9% in the first quarter of 2010. (Interest rates in Brazil are historically among the highest in the world reflecting the country’s long-term history of run-away inflation. Under the last two presidential administrations the country has gotten its fiscal house in order—Standard & Poor’s rated Brazil’s debt as investment grade for the first time ever in April 2010—but it will take a while for that to lead to lower interest rates.)

But if the June decline in inflation isn’t enough to end the central bank’s rate increases, it should give investors confidence in projections that the bank will call at halt to the increases in the last quarter of 2010 at somewhere around 12%. That would lift one burden now weighing down Brazilian stocks.

And that’s the good news today from Brazil.

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