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Australian retail sales unexpectedly fell for the first time in 10 months, sending the nation’s currency, stocks and bond yields lower as bets increased on the central bank’s fourth interest-rate cut since November.

Sales dropped 0.2 percent to A$21.2 billion ($20.7 billion) from March, when they gained a revised 1.1 percent to a record, the Bureau of Statistics said in Sydney today. The result compares with the median forecast in a Bloomberg News survey of 20 economists for a 0.2 percent gain.

The data span a period before Reserve Bank of Australia Governor Glenn Stevens slashed the overnight cash rate target by half a percentage point to a two-year low as inflation cooled and the economy struggled to gain traction. The RBA is trying to boost a housing market in which prices have fallen for five straight quarters, support employment and help confidence that has weakened among consumers who are saving more.

Today’s report “reflects consumers remaining stubbornly cautious despite rate cuts and the possibility of further easing,” said Katrina Ell, an economist at Moody’s Analytics in Sydney. “Unless rate cuts can help consumers get their mojo back in coming months, retail trade is condemned to be below trend through 2012.”

Traders are pricing in at least a quarter-point reduction in the RBA’s benchmark rate to 3.5 percent at its meeting next month and see a 38 percent chance of a 50 basis-point cut, swaps data compiled by Bloomberg show. The local dollar traded at 97.85 U.S. cents at 12:30 p.m. in Sydney, compared with 98.11 cents before the data.

Record-Low Yields

The three-year bond yield dropped to 2.313 percent, a record, and 6 basis points below yesterday’s close; and the 10- year bond yield fell as low as 3.102 percent, 4 basis points below yesterday’s close. Australia’s S&P/ASX 200 Index fell 1 percent.

Spending at department stores fell 1 percent, and consumers spent 0.8 percent less on household goods, today’s report showed. They spent 0.4 percent more at cafes and restaurants, it showed.

Consumer-price growth in Australia was subdued last quarter as the cost of food and non-alcoholic drinks fell 2.1 percent, paving the way for this month’s rate cut. Fruit plunged 30 percent as the breaking of nearly a decade of drought and a historically mild summer caused a glut of fruit and vegetables, the April 24 inflation data showed.

Slower Growth

The central bank, in its quarterly monetary policy statement released this month, cut growth and inflation forecasts.

The RBA sees average growth of 3 percent in 2012, down from its February estimate of 3.5 percent. Consumer prices will rise 2.5 percent in the year to December, from a previous prediction of 3 percent; underlying inflation is predicted at 2.25 percent from a previous 2.75 percent, the central bank said.

“Labor market conditions have continued to be on the soft side to date, with large increases in employment in mining and some service industries roughly offset by declines in the manufacturing, hospitality and retail sectors,” the central bank said in the May 4 statement. “A recovery in housing construction is unlikely in the near term.”

A separate report today showed construction work done rose 5.5 percent last quarter from the final three months of 2011, led by engineering as the nation’s mining investment boom intensifies.

Mining Investment

The RBA, in its May 4 statement, raised its outlook for mining investment, saying its liaison suggested some projects previously seen as “only possible now look more likely to go ahead.”

The RBA’s benchmark rate, at 3.75 percent, is the highest among major developed economies.

David Jones Ltd. (DJS), Australia’s second-largest department store chain, forecast its smallest profit in six years as rising costs, falling sales, overseas competition and the strong Australian dollar crimp earnings.

David Jones said March 21 that net income will fall 35 percent to 40 percent in the year through July. The forecast implies earnings of A$101 million to A$109 million, as much as 28 percent below the average of 11 analyst estimates compiled by Bloomberg.

Pacific Brands Ltd. (PBG) said its first-half loss widened 72 percent after it wrote down the value of its underwear division and said the retail outlook remained “challenging.”

The loss in the six months ended Dec. 31 widened to A$353.9 million, from A$206.1 million a year earlier, Melbourne-based Pacific Brands said in a Feb. 17 statement. The apparel company said it will write down the goodwill on its underwear unit by A$388.7 million and that restructuring costs totaled A$13.4 million. Sales declined 19.6 percent to A$684.7 million.

“The writedown of goodwill in the underwear business is disappointing, but a necessary step to reflect the impact of trading conditions,” Pacific Brands Chief Executive Officer Sue Morphet said at the time.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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