With the release of the September round of manufacturing PMIs there are some important macro themes, nascent trends, and investment implications worth paying attention to. In this article I will take you through what I believe are the key takeaways for markets and investors.
The first chart I want to highlight is the JP Morgan Global Manufacturing PMI. After rising in September to 51.0 (50.8 in August) the breakout shown in the chart below appears to be intact. This is a critical point as the global PMI has been in a consistent downtrend since 2013. A break from this implies the avoidance of a global recession (which is the logical conclusion of such a trend) and possibly even a transition out of stagnation and divergence into a period of more synchronized and improved global growth. The following charts discuss this notion further and conclude with an important implication.
2. Emerging markets and developed markets turning up
The graph below from IHS Markit shows emerging markets in a clear if choppy upward trend having sunk into recessionary territory last year. At the same time the developed world PMI is also on an improving path after hitting its lowest point since the eurozone debt crisis. The divergence between emerging markets and developed economies which opened up last year closed initially with developed economies “catching down”, but this has now transitioned to a more synchronised upturn. If the nascent trends here are able to be sustained this will set the scene for a recovery in global growth and an eventual transition from ultra-easy unconventional monetary policy – but a transition that is likely to be so gradual as to see risk assets supported in an improving growth environment.
3. Trade orders point to improvement
As we highlighted yesterday the Topdown Charts own global trade bellwether PMI indicator that tracks the export and import orders sub-components of the manufacturing purchasing managers indexes for a representative set of countries points to a mild rebound in global trade growth. The leading indicator points to global import volume growth rising from around 0% to around 3%, thus the warnings from the WTO and IMF about the slump in global trade may have been a contrarian indicator that we have seen the worst of the downturn in the global trade cycle. Of course even if global trade improves to 3%, it’s still below the long term average, but it is something that will help reinforce the trends in the previous chart and will at the margin support the idea of a period of a synchronized upturn in global growth.
4. An important divergence
This brings us to one of the key implications for markets. The divergence shown in the graph below (from Nordea Markets) between bond yields and the global PMI is incredible and surely will not last. While divergences can close from either direction I would argue that bond yields are simply too low, the result of QE and political uncertainty – more artificial and temporary factors. Indeed with rumors about the ECB talking taper and the BoJ already undertaking a stealth tapering program the already fragile bond market need not look far to find a potential catalyst to close the gap. Thus we would remain cautious on exposure to yield sensitive assets, bonds themselves remain at risk of capital loss in a rapid reset in yields and anything that has benefited from low yields such as REITs, emerging market debt, high yield credit, will be vulnerable.
This report highlighted the global manufacturing PMI breaking out of its downtrend, both emerging markets and developed economies seeing an upturn in their PMIs from multi-year lows, and an improvement in the outlook for global trade. These are conditions consistent with a trend towards a period of faster and more synchronized global growth. As the transition from ultra-easy monetary policy is likely to be slow (albeit with potential bumps along the way e.g. with tapering) bonds yields will likely head up but risk assets with still stimulatory monetary policy and an improving growth backdrop this is the type of environment that equities and commodities can still perform well in. But as the last chart shows, it will pay to be wary of exposure to yield related assets as this divergence, as with the others, will close sooner or later.
Bottom line: The latest round of PMIs point to a somewhat brighter outlook for global growth and thus, while being supportive for equities and commodities, present risks to bond markets and yield related assets.