The latest trend in the global and domestic economic data is towards a decline in manufacturing, but an increase in services. Manufacturing is highly cyclical, with there having been 2.5 cycles of weakness within this economic business cycle if you count the current bout of weakness as half. The three charts from Haver Analytics show the situation in the global manufacturing economy.
Source: Haver Analytics
The share of PMIs that are above 50 is at a 10 month low. 82.9% of PMIs being above 50 is still good, but the recent peak was near prior peaks and the current rate of change looks terrible. The worst possible scenario to be in as an investor is when you are long an investment which has provided great returns has high future expectations, but the results are going from great to very good. As we mentioned earlier, there have been two other slowdowns which have occurred within this expansion and bull market. By definition, this slowdown is later in the cycle than the prior two. It is happening along with a flatter yield curve which is worrisome. By the time this next slowdown is at it’s worst, the curve has the potential to be inverted.
Don’t Worry About The Global Inversion Yet
As an aside, the global yield curve has inverted, but that’s because of the weighting of the index since the curves of every major country are normal. This weighting is manipulated by the fact that US debt has shorter maturity dates than the other major countries. The Fed rate hikes essentially are up against the low yielding European and Japanese long bonds. America represents 50% of the JP Morgan 1-3 year government bond index, but only 25% of the longer-dated 7-10 year bonds.
The Financial Times chart below shows the shape of each curve.
Source: The Financial Times chart below
The flatness of the US yield curve isn’t surprising when you consider how hawkish the Fed is in relation to the other central banks. The ECB and BOJ’s short-term rates are still negative.
