Morning Notes — Flash PMI Data Ahead

During the last week of December we discussed our 2020 forecast, which centers on expectations for above-trend global growth sometime around mid-year. Today’s South Korea Q4 GDP beat and strong Industrial Production out of Taiwan help make the case, but our best forward-looking indicator are manufacturing Purchasing Managers Indices (PMI). You can pull the major country PMIs together to form a global manufacturing PMI number, which has a strong positive correlation to global GDP growth. This data series began to base in September and showed modest improvement until last month, when it ticked down from 50.3 to 50.1. Note levels above 50 indicate expansion, below 50 indicate contraction. We follow PMI data closely and our conviction for above trend growth comes from past episodes when PMI based following a period of monetary accommodation. We first mentioned this theme back in late August/early September based on cyclical sector performance divergence and began measuring out past episodes to correspond with expectations for this cycle to reveal itself in late Q1’20. Of course, these expectations are based on circumstantial evidence and investors are justifiably skeptical. The last two similar episodes were cut-off by a Fed-led tightening cycle. The Fed could cut off this growth cycle too, but members have recently expressed regret over the last two tightening cycles and suggest a much higher bar this time around (2%+ core inflation for an extended period).