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Why the Brazil PMI confirms a downward spiral (Part 3)

Sr Emerging Markets Analyst

Continued from Part 2

The latest PMI placed Brazil under the 50 point line, signaling contraction

Out of the five key sub-indices making up Brazil’s (EWZ) PMI, five posted drops.

Stubborn inflation

Inflation hit costs hard, rising at the fastest pace in more than three years and squeezing margins in the process.

A large component of the increase in prices was due to weaknesses in the currency, which have depleted the purchasing power of producers when buying raw materials denominated in foreign currencies. The Brazilian real has depreciated more than 10% over the past three months.

Prices charged to consumers increased as well, as producers attempted to pass on the increase in costs. Nonetheless, costs increases outpaced price increases.

(Read more: How investing in emerging markets differs from developed markets)

Inventory depletion

Inventories were also down—partially driven by producers holding less inventory due to decreased demand and partially due to producers trying to lower their working capital in order to lower their costs base.

Both the stock of finished goods and the inventories of raw materials were marginally down. Naturally, the amount of purchased goods was down as well, though this was the first time in eight months that the quantity purchased posted a contraction.

Suppliers’ delivery times lengthened. But unlike the usual case, when this lengthening follows increased demand, this time it resulted from the protests.

(Read more: Mexico’s unemployment is not showing signs of recovery)

Continue to Part 4: Drivers of market returns

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