Growth in manufacturing slows to six-month low and may continue to do so
Of most large emerging markets, Brazil seems to be the most promising one when compared against the BRICS and Mexico given lower valuations and less severely depressed macroeconomics.
The PMI is a good predictor of short to medium-term performance and offers a lot of insight when delving into the indices that compose the overall PMI.
Andre Loes, HSBC’s Chief Economist for Brazil, said:
“The HSBC Manufacturing PMI Index retreated for the third month in a row… reinforcing perceptions that after a strong January, economic activity lost momentum over the remainder of the quarter. This is yet another sign that the recovery of 2013 is quite modest.”
Production may continue to slow down
The index dropped to 50.8 from the previous 51.8 in March. While the value remains above 50, which implies expansion, this is the third month in a row that the manufacturing sector slows down. Part of the increase was driven by new contract wins.
New orders slowed down again for the 7th month in a row, which means near-term production is unlikely to expand significantly. To compound the issue, new export orders fell below the 50 line, showing the first contraction in four months.
Shedding jobs and margin squeezes
April showed a drop in employment as the indicator fell just marginally below 50. Respondents stated that the job losses were caused by non-replacement of voluntary leaves, though this implies that there is a sluggish medium-term outlook for demand.
Furthermore, input prices continue to increase at a higher rate than input prices. Basic raw materials, such as steel, plastic and fuel, continued to see their prices rise.
Output prices continued to increase, but not as fast as costs. The report mentioned manufacturers were attempting to pass through cost increases to clients. If this asymmetric increase in costs and prices charged continues, margins will progressively become more squeezed.
In the short-term, Brazil macroeconomics do not look promising. Additionally, the central bank recently raised interest rates 25bps, which may have an adverse effect on growth as well, though hopefully it will curb inflation. Once again it seems the market will continue to trade sideways in the medium-term until there is a catalyst for change.