In keeping with the great reports elsewhere, the Markit Flash PMI showed economic strength. Private sector growth reached a 9 month high in October mainly because of the improvement in manufacturing. The composite output index was 55.7 which was an improvement from last month’s report of 54.8. The services index improved from 55.3 to 55.9 which is a 2 month high. The manufacturing PMI was up from 52.4 to 54.5 which is a 9 month high. This report shows the business cycle has started again just like we saw in the Caterpillar and 3M reports. The trade is to buy the firms that are in manufacturing, but haven’t rallied as much as the others. It appears China made sure the transition of leadership went smoothly by making sure the economy is strong. In the long term, the hope is the country focuses on free market reforms.
Speaking of emerging markets, the Brazilian central bank cut rates 75 basis points to 7.5% on Wednesday. It’s expected to cut them by 50 basis points in December to the lowest ever. Inflation has cratered from the double digits to below 3%. The economy finally stabilized this year as the depression which ravaged the economy in 2015 to 2016 has ended. This economic improvement certainly helps guide the global recovery. The yield curve is signaling additional stress next year from the upcoming elections. The hope is reforms continue no matter who is picked. A healthy Brazilian economy is important because we are now at a point where India, China, and Brazil are all on the right track.
Getting back to the Markit PMI report, the impact from the hurricanes is still being felt as the report showed the greatest pressure on the manufacturing supply chain since 2014. There still are depleted inventories, transportation delays, and increasing raw materials prices affecting the supply chain. Manufacturers needing to catch up to production schedules helped the manufacturing PMI.
Besides the improvement from emerging markets, there has also been improvements in financial conditions which have helped the economy grow this year. As you can see from the chart below, the Chicago Fed national financial conditions index is at the loosest period in this recovery even though the Fed has raised rates twice this year and started to unwind the balance sheet. Financial conditions are the loosest since 1993 which explains why volatility is the lowest since the mid-1990s.
