Of the principal producers of Purchasing Managers’ Indexes, the October reports have now been released by the Markit Group (which covers private sector companies but not the public sector), and the Institute for Supply Management (which covers business establishments that fall under the NAICS category), and originated the manufacturing and non-manufacturing metrics they use for the US economy back in 1948.
For the Markit Purchasing Managers Index (PMI) Manufacturing reports, 20 countries saw an improvement vs last month (compared to 13 in the Sep / Aug comparison), and 16 worsened (from 19). This now leaves 17 countries above the key level of 50, and 19 below.
Of the majors, Germany bounced a little in October (41.9 to 42.1), but it remains at the bottom of the pack and they also have the weakest absolute number from all the countries reporting. The US number fell a little to 51.3, still ahead of the key 50 level.
As we know, manufacturing in the US currently makes up roughly 15% of GDP, whereas services comprise the lion’s share these days and supports some 90 million jobs domestically. Both Markit and the ISM reported service PMIs yesterday. The former painted a weaker picture, with the employment sub-component falling to the lowest level since Dec 2009, whilst the latter was more positive, with improvements in new orders and supplier deliveries although new export orders hit a 2 year low.
Interestingly, with the US ISM Manufacturing PMI at 48.3, our analysis suggests that over the last 20 years, there have been zero occasions of negative returns in US Treasuries over the subsequent 12 months with a PMI reading between 40 and 48. By the time PMI readings have hit cycle lows, the Federal Reserve has usually been easing for some time and recoveries are then characterised by positive returns for risk-assets and Treasuries eventually sell-off. At the moment, we are in the early stages of Fed easing and are currently a very long way off signs of a recovery, thus our preference for a high grade portfolio at present.