Hi guys! - Welcome back to Market Macro Hub.
There’s a tonne to talk about, especially in this climate. So much so, this will be a trilogy breaking down the current global macro picture.
In this piece, we will dissect the following:
Global Growth, U.S Labour Market & The Tech Meltdown
The IMF’s recent global outlook shows that global growth is expected to slow from 6.0% in 2021 to 3.2% in 2022 and 2.7% in 2023. Keep in mind that this is the weakest growth profile recorded since Covid-19, the GFC (Global Financial Crisis in 2008) & 2001.
When observing growth I tend to focus on leading indicators as supposed to lagging indicators/hard data such as GDP, CPI & employment. Surveys are the most common form of leading indicators; readings such as ISM, PMI & consumer confidence provide a forward-looking viewpoint of current conditions.
Let’s rewind and explain what this really means for those who may not fully understand.
The manufacturing PMI index is a survey that simply measures the month-on-month change in economic activity within the manufacturing sector. Why this sector in particular? Well, it’s the most sensitive to changes in the economy from commodity prices to interest rates and usually, the manufacturing sector is the first to blow up in a recession. A great proxy for judging the cycle of an economy/ the global economy. When the readings are above 50 this is expansionary and vice versa for below 50 being contractionary.
Across major economies exporting goods the overall trend has been bearish since July 2021 but remained above 50 which meant managers within the manufacturing industry saw signs of expansion and development within the economy. However, since April, there was an overall acceleration of the downward trend in PMI most likely caused by the uproar in inflation globally, succeeded by the most aggressive hike in interest rates by central banks globally.
So what does this mean for equities?
Take a look at Figure 2&3.
YTD U.S equities have returned anywhere between (-20%) and (-33%) on capital deployed. Sure, you could blame the worsening macro picture, the rising of interest rates and the portfolio rebalance away from riskier assets and into safety but those aren’t the only factors at play.
ISM, otherwise known as the Institute for Supply Management is a heavily overlooked survey showing comparable data points to the PMI index. Now, with a correlation near or even over 80% the ISM index is the best indicator of the U.S economy but moreover the direction of the S&P500. Simple business cycles leading the direction of U.S equity markets.
As we’re focused on global macro we now need to employ second-order thinking; if the U.S, UK and Europe’s manufacturing industries are signalling signs of a slowdown, what is the source? Where is this coming from?
The source of this contraction must also be the source of expansion, so we now need to look beneath the layer and ask. Who drives synchronised global growth?
Bingo!
China. So rewinding back to February when China enforced strict lockdown measures across Shanghai, affecting goods stuck at trade ports we saw the effect this had on supply chains globally. Consequently, if China slows down that has implications for Germany (a major manufacturer of goods & GDP contributor for Europe), the U.S, Uk and India. So forth and so forth. As a result, you see the chain and domino effect caused by one discrepancy within the global financial system.
Yesterday, China's exports YoY came out negative (0.3%) against expectations of a 4.3% increase. Using second-order as a framework we can now put a picture together of the domino effect the markets may have.
Add to that cocktail multi-decade-high inflation and numerous cracks within the global economy from a levered pension fund industry, to fragmentation risk in the Euro Area, to Canadian private sector debt, which currently sits at over 280% relative to GDP, a figure that is higher than the peak of the Japanese housing bubble in the 1980s!
The moral of the story, we’re cooking up an already overheated economy and screws are starting to come to lose in different places within the global financial mechanism. I broke down on my last note how housing across the Uk, Canada and Australia are on the brink of cracking due to rapid rate increases.
Labour
As the global financial world enters the next phase of the downturn cycle we’re about to foresee, layoffs have been in the eye of major tech companies in hopes to preserve cash flow & earnings outlooks.
It’s a bloodbath out there, with the most notable names Twitter and Meta being forced to cut thousands of employees from their workforce.
Total nonfarm payroll employment increased by 261k in October whilst the unemployment rate rose to 3.7%.
I’m not going to focus too heavily on the unemployment rate in the U.S as this is a lagging indicator which at the moment is only clarifying the fact that the U.S has bottomed out on the subject of unemployment; I expect to see this particular number increase as companies begin to feel the squeeze of conditions whilst the Fed continue to raise rates all the way until 5%.
This is it for pt.1, but we’re back on Friday with an insight into:
The bull run of the dollar
Commodity crisis & energy desperation
The debt market’s strategic positioning
Thanks for reading!
Finally, if you’re gaining knowledge from this could I ask you to share this with someone like you?
It’s free game — why not ;)
Until next time