Data decline eases for Germany and US
The last few weeks have brought us some very early signs that, in some parts of the global economy, we might be seeing a bottom in terms of low activity levels. Better news on Brexit and progress in trade negotiations between China and the US have certainly played a role, but these are not the only factors behind these improving trends.
Last week the flash Purchasing Managers Index (PMI) reports for November were published around the world. Starting with Germany, one of the hardest hit in the recent global trade slowdown, the PMI Manufacturing number improved for the second month running. At 43.8 it is still well below the 50.0 threshold that separates expansion from contraction, but the pace of decline has eased for a second consecutive month. Most of the comments in the report remain negative, as you would expect given the sector is still contracting, but a good number of underlying indicators are moving in the right direction. Although the more volatile PMI Services numbers continues to slow, the PMI Composite (which aggregates both manufacturing and services) also showed its second consecutive month of gains. Finally, confidence surveys have also improved, with the GFK Consumer Confidence index stabilising in recent months, along with the IFO Business Climate, IFO Expectations and IFO Current Assessment surveys.
In the US, November’s PMI numbers were also an improvement on October for both manufacturing and services. The Composite Index jumped a whole point to 51.9 and continues to move away from the 50.0 threshold, helping to ease recessionary fears. We noted that comments in the survey regarding employment also indicated a positive trend, reversing the deterioration we had seen over the last couple of months. Next week the ISM Manufacturing and Non-Manufacturing numbers will be released, which are definitely worth close scrutiny, as they have diverged slightly from the more positive PMI figures. Last week we had the University of Michigan Consumer Confidence survey, which also showed a continuation of the strong recovery we have witnessed since August, reinforcing comments both from the large US banks and the Federal Reserve that the US consumer is in good health.
While we do not expect a sharp, V-shaped recovery in the coming months, we cannot ignore that some data is finding a floor and bouncing back slightly, along with better headlines regarding geopolitics. In our view this is a welcome development for risk assets as it shows that the risks of a recession are lower in the US than some market participants had previously anticipated, though Germany is likely to remain close to zero growth despite the recent uptick in activity.
While spreads do not appear particularly cheap, we continue to feel that risk assets will remain well supported into year-end, while government bond markets will likely be less so as we discussed at the beginning of this month. To be clear, we do not think this bounce or stabilisation in data will make investors want to add significant amounts of risk and geopolitical risks remain, with the trade talks between the US and China in particular finely balanced. However, risk assets look more attractive than they did a month ago.