Thursday, March 7, 2024

Morning Note: Manufacturing "Mini Upcycle" -- And -- Beware "The Other Side of the Parabola"

In our latest economic update I entertained the notion that the recent strengthening in manufacturing sector sentiment might prove to be a head fake.

On Monday, BCA suggested that that may indeed be the case:

"Global Manufacturing PMI Returns To Growth

The JPM Global Manufacturing PMI improved from 50.0 to 50.3 in February, indicating that global manufacturing activity is growing again after having contracted for 18 months.

Notably, new orders expanded from previously contracting levels (from 49.8 to 50.4) and new export orders’ pace of decline slowed (from 48.8 to 49.4), suggesting that global demand for manufactured goods improved in February. Global output grew at a faster pace (50.3 to 51.2) and global employment’s decline slowed.

Meanwhile, the forward-looking new orders-minus-inventories measure ticked up. Other leading indicators of global growth have also been firming. Sweden’s new orders to inventories ratio remains on an upward trajectory and Taiwanese export orders improved significantly in January.

That said, although US Manufacturing PMI accelerated in February from 50.7 to 52.2, the alternative ISM gauge unexpectedly fell deeper in contraction. Moreover, manufacturing activity is still contracting in other major DM economies (notably the Eurozone, UK, Australia, and Japan). And while China’s Caixin manufacturing PMI is still in expansion at 50.9 in February, the alternative NBS manufacturing measure declined further below the 50 boom-bust line (see The Numbers).

Ultimately, global manufacturing activity is experiencing a mini upcycle. Yet given that the US is the main driver of this global trade recovery, and economic conditions in China and the Eurozone remain lackluster, we ultimately expect the global trade improvement to be short-lived. Indeed, global growth conditions will eventually deteriorate once again as the US economy heads toward recession later this year or in early 2025.

Therefore, we recommend an underweight allocation to global equities on a cyclical 12-month investment horizon."

On another note, in yesterday's market snapshot I talked about the abundance of mixed signals that seem to be presently influencing markets, and, as I suggested, while Tuesday's action offered up hints of how the present cycle may indeed ultimately play out, I said that I think it's still too soon to make that call.

Bloomberg macro expert Cameron Crise made a similar observation in his column yesterday:

"Tuesday’s price action offered a couple of hints about the sort of comeuppance that may unfold for over-exuberant investors, but hints were all they were."

He then went on to warn the unsuspecting investor of the precarious nature of the present equity market setup:

"...the valuations of some popular securities look cuckoo, and have rarely rewarded investors for taking buy-and-hold risk at similar points in the past. Things can always get more expensive, though, so going short can be tough (even if sentiment is such that a short position would usually work in “normal” markets.) Participating in parabolic markets is fine, as long as you’re prepared for the other side of the parabola..."
Stay tuned...

Asian equities leaned green overnight, with 9 of the 16 markets we track closing higher.

While Europe's mostly green so far this morning, with 16 of the 19 bourses we follow trading up as I type.

US equity averages are higher to start the session: Dow by 187 points (0.48%), SP500 up 0.60%, SP500 Equal Weight up 0.80%, Nasdaq 100 up 0.68%, Nasdaq Comp up 0.55%, Russell 2000 up 0.92%.

This morning the VIX sits at 14.49.

Oil futures are down 0.77%, nat gas futures are down 1.81%, gold's up 0.12%, silver's up 0.48, copper futures are up 1.09% and the ag complex (DBA) is up 0.27%.

The 10-year treasury is up (yield down) and the dollar is down 0.15%.

Among our 36 core positions (excluding options hedges, cash and money market funds), 31 -- led by XME (base metals miners), URNM (uranium miners), XLB (materials stocks), Dutch Bros and GDX (gold miners) -- are in the green so far this morning... The losers are EWZ (Brazil equities), LEMB (emerging mkt bonds) and LTPZ (long-term TIPs).

While the analogy I'm teasing out of this morning's quote is indeed dramatic -- perhaps overly so -- I would only apply it when valuations and overall general conditions make traversing present market elevations a potentially precarious endeavor:
"It would seem almost as though there were a cordon drawn round the upper part of these great peaks beyond which no man may go. The truth of course lies in the fact that, at altitudes of 25,000 feet and beyond, the effects of low atmospheric pressure upon the human body are so severe that really difficult mountaineering is impossible and the consequences even of a mild storm may be deadly, that nothing but the most perfect conditions of weather and snow offers the slightest chance of success, and that on the last lap of the climb no party is in a position to choose its day.…"

--Eric Shipton, in 1938, Upon That Mountain (Everest)... From Jon Krakauer's Into Thin Air 

Have a great day!

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