Global PMI Wrap - Aug 2016
It's always worth keeping an eye on the PMIs as an early lead for changes in macro trends and for the sake of understanding the existing trends. These trends will ultimately exert themselves on global markets. So when you see the global manufacturing PMI falling slightly in August it raises a couple of questions...
First up is the trend, from 2013/14 there is a clear slowing trend. We know much of this slowing trend can be explained by the commodity collapse, strong US dollar, and slowdown in China and emerging markets. As such the stabilization and then rebound in July is to be expected as China stepped up stimulus and commodity prices stabilized.
Indeed, you can see the near synchronized rebound in the major emerging market PMIs below. This brings up the second question - i.e. the sustainability of the rebound. The trouble is so far the rebound has just been a case of "crisis averted" rather than an upturn or acceleration. Still, it's one of the key macro developments this year and presents a more benign global backdrop for the likes of the US Federal Reserve (which has had its rate hike plans sidelined by global issues over the past year or so).
Switching over to developed markets, it's a case of de-synchronization. The US PMI rebounded in July after a steady decline induced by the shale oil collapse and tightening impact of the strong US dollar. Currency has likewise hit Japan hard as Abenomics has hit the wall. The Eurozone is basically at ambivalent levels as powerful monetary stimulus bumps up against the confidence hit from the Brexit vote and ongoing political uncertainty/fragility. The UK on the other hand has swiftly bounced back from the initial Brexit shock as the Bank of England front-footed with a big increase in stimulus with fiscal policy likely to follow-through.
In all we're left with emerging markets having made a synchronized rebound, and developed markets looking distinctly de-synchronized. What's key for the global outlook is ongoing stability/recovery in commodity prices, stability in the US dollar, and ongoing policy support (fiscal and monetary). It's fair to say that global growth still looks fragile, gradual, and divergent.
Going back to the initial questions it is tempting to assert that we have seen a trend change - at least from down to sideways. But for now there remains too much political risk, too much uncertainty, and too little confidence for activity to really surge from here. So for markets it means limited upside - but upside is most likely - for bond yields and global equities... if for no other reason than the fact that the downtrend appears to have stalled and the sense of "crisis averted" that has kicked in on emerging markets. For markets when pessimismis pervasive no bad news is good news.
Bottom line: The downtrend in the global manufacturing PMI appears to have stalled and a weak and constrained rebound is underway. This will likely mean some upside for global equities and bond yields.