Brazil's retail sales rose for the seventh month, reinforcing the view that local demand will continue to drive economic growth and lead the central bank to raise rates in the first half of 2010 to control inflation.

Sales rose 8.7 percent in November from a year ago, the national statistics said today in Rio de Janeiro. It was the best annual result since October 2008, when sales advanced 9.8 percent. The increase in October was revised to 8.6 percent from 8.4 percent, the agency known as IBGE said.

"Domestic demand continues to be without a doubt the main driver of the Brazilian economy," Newton de Camargo Rosa, chief economist at Sul America Investimentos, said in a phone interview from Sao Paulo. "Stronger demand will at some point force the central bank to raise rates."

Brazilian central bankers may increase Brazil's benchmark interest rate as early as March, according to Bloomberg estimates based on interest-rate future contracts. Rosa expects the monetary authority to start raising the so-called Selic rate in June, lifting it to 11 percent by year-end.

Yields on interest rate futures rose with the yield on the contract for January 2011 delivery, the most traded on Sao Paulo's BM&F commodity and futures exchange, increasing 3 basis points to 10.33 percent at 7:50 a.m. New York time. The real fell 0.7 percent to 1.7693 per dollar from 1.7569 yesterday.

The year-on-year result for November was lower than the forecast for a 9.2 percent advance in a Bloomberg survey of 23 economists.

Eoin Treacy's view This article by Markus Jaeger for Deutsche Bank may also be of interest. Brazil is a leading example of what an emerging market can do when it gets its fiscal act together. US Dollar reserves overtook external debt for the first time in 2008 and Brazil is now a creditor nation, most notably lending money to the IMF following last year's credit crisis. This is an impressive performance by any standard but even more so when compared to that of some of Brazil's neighbours. The country exemplifies what can be achieved when sound economic governance is embraced.

CDS Spreads have collapsed from near 4000 basis points in 2002 to 120 today. CDS for a number of the more debt laden Eurozone countries currently trade at wider spreads, which emphasizes the change in relative economic fortunes, particularly over the last 18 months. Brazil's CDS spread spiked briefly in 2008 to 600 basis points but has stabilized above 100 over the last six months and a sustained move above 200 would be required to suggest anything other than a continued belief in the strength of Brazil's fiscal position.

The Real has been a clear beneficiary of the economic improvement, rallying from just over BRL4 in 2002 to today's BRL1.75, against the US Dollar. Last year's US Dollar rally broke the consistency of the 4-year move and while there remains ample opportunity for the Real to appreciate over time, there is also the likelihood that the low hanging fruit have been picked,

In June, as the economic recovery gained credence and the likelihood of a higher interest rate environment increased, 3yr Real bond yields found support at the 2007 low near 10%. They remain in a medium-term uptrend and a sustained move below 12% would be required to question scope for further upside. Longer-dated US Dollar denominated bonds have been more in the demand over the last year and yields remain a downtrend whose primary consistency characteristic has been a progression of lower rally highs. A sustained move above 5.25% would be required to question scope for some further compression.

The Bovespa Index has been one of the better performers, globally, since the 2008 bottom and indeed since 2002. The Index has posted a positive return in 10 of the last 11 months as it raced back to test the 2008 high and is somewhat overextended relative to the 200-day moving average. It has posted three reactions of approximately 8000 points, one above another, since March last year. Each one of these congestion areas has been completed with an emphatic upward break. The Index broke upwards from the most recent of these in November but the pace of the ascent has slowed somewhat as it approaches a potential area of resistance near the 2008 high.

A sustained move below 65,000 would dip back into the previous range which would mark an inconsistency. A move below 60,000 would be a larger pullback, break the progression of higher major reaction lows and probably break through the 200-day moving average. However, such a pullback would need to be sustained to question the market's medium to longer-term upside potential because we cannot rule out a correction in the region of the prior high which could hold the market up for longer than we have seen over the last year.

The discovery of the Tupi oil field lends an added dimension to Brazil's longer-term potential. How the monetary benefits of this natural bounty are governed will have a major impact on Brazil's economic future. The fiscal responsibility fostered over the last decade will need to be maintained if Norway and Canada's example in managing energy assets and wealth is to be followed. Otherwise the economic dividend could be wasted in hubris and rising inflation. This makes monitoring the country's standards of corporate, civil and economic governance an important ingredient, in conjunction with the price charts in following this secular bull market.


Commodities Outlook - Thanks to a subscriber for this detailed report by a host of authors at Deutsche Bank. The whole report is well worth reading but here is a section on oil supply costs: