Inflation in Brazil Hits Lowest Level Ever

Brazilian and Latin American stocks retreated, as investors cashed in some of the region’s recent heady gains on optimism about the economy. Tame Brazilian inflation data helped to limit the Bovespa’s losses.

Brazil’s Bovespa Index dipped 66.26 points, or 0.19%. Mexico’s benchmark Bolsa Index fell 60.89 points, or 0.33%, while Argentina’s Merval Index dropped 10.61 points, 0.66%.

Brazilian stocks slumped, as investors locked in some of the market’s torrid gains over the first three trading sessions of the new year.

Investors have been pouring into Brazilian equities on expectations of continued solid economic fundamentals, tame inflation and further interest-rate declines in 2006.

Brazil’s central bank is seen extending its recent interest-rate cutting campaign at its first meeting of the year on January 18. The bank has cut rates, which now stand at 18%, at each of its last four meetings.

Adding to optimism about inflation and interest rates, Brazil’s General Wholesale and Consumer Price Index, or IGP-DI, ended 2005 at 1.22%, down sharply from 12.14% in 2004 and its lowest level since the Getulio Vargas Foundation began releasing the index in 1944. The Foundation attributed the lower inflation level largely to the reais’ appreciation against the U.S. dollar.

On the corporate front, budget airline Gol Linhas Aereas Inteligentes raised its net revenue estimate to 4.1 billion reais for 2006, up slightly from a previous estimate of 4 billion reais.

The airline also boosted its earnings per share forecast to a range of 3.90 reais to 4.30 reais from a previous estimate of 3.70 reais to 4.15 reais.

However, an investment bank downgraded Gol’s American Depositary Receipts to "market-perform" from "outperform" and cut its fourth-quarter earnings estimate for the company. The bank said Gol’s yields are trailing its expectations for the fourth quarter.

Meanwhile, Brazil’s Civil Aviation Department reported that paying passengers on Brazilian domestic flights flew a total of 3.24 billion kilometers in December, up 25.3% from a year earlier.

Elsewhere, Mexican shares slumped, as investors took some profits following stellar gains over the past few sessions on optimism about the economy’s health and hopes for lower interest rates.

In corporate news, tortilla and corn flour company Gruma SA said it signed a memorandum of understanding to sell a 40% stake in Venezuelan unit Molinas Nacionales to Venezuelan businessman Ricardo Fernandez for US $65.6 million.

A brokerage said in a research note that "this is a move in the right direction for a company that has been historically reluctant to dispose of underperforming businesses."

Meanwhile, Mexican telecom regulator Cofetel said Telefonos de Mexico SA has lowered rates for calls to cell phones for the second year in a row as a part of a three-year plan to reduce rates that began in early 2005.

Profit taking also dragged Argentine issues lower, snapping a five-session winning streak. In the news, Economy Minister Felisa Miceli commented that Argentina’s inflation, which surged in 2005, is under control and that the economy would continue its strong growth for the fourth consecutive year in 2006.

Some investors have been concerned that her methods of containing inflation will be ineffective. In one of her first steps to combat inflation after assuming the post of finance minister late last year, Miceli enacted price controls on key supermarket foodstuffs.

Data released late yesterday showed that that inflation jumped 12.3% in all of 2005 State-run energy company Energia Argentina S.A. reported zero income in its first year of operations, leading to an operating loss of 1.6 million pesos.

Thomson Financial – www.thomsonfinancial.com

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