Morning Notes — Catalyst Vacuum

The outperformance of cyclical indices beginning in early September was the first indication of a potential improvement in global PMI data 3-6 months forward. The first cyclical index to diverge was the Philadelphia Semiconductor Index (SOX), an index that also happens to be highly trade-sensitive. The SOX began improving prior to any press reports of a ‘phase-one’ US-China trade deal. Since the late summer, we based any trade optimism on US political expediency ahead of 2020 elections and still believe it’s the only reason to expect potential further, small tariff rollbacks during the late summer. In aggregate, the inventory piece of global PMI has contracted during the course of 2019, which means a pick-up in manufacturing could lead to restocking and extend the cycle. We expect China and emerging Asia economies to experience the improvement first, followed by Japan, Europe and then the US sometime in the second half of next year. Note the US has been the most resilient economy in the mix with soon diminishing benefits from fiscal stimulus beginning next year. A broad turn in global growth is solidly on track, but likely to be very slow at first with Q4 weighed down by October’s GM strike, Japan consumption tax, and typhoon. But when it does start to improve, it should have room to run given the Fed’s recently articulated high bar to begin a tightening cycle.