Morning Notes — Global Growth Cycle

The early-September positive divergence from cyclically-sensitive semiconductors was our first clue on a future recovery in global growth. Positive divergences in cyclically sensitive sectors and indices (NKY, DAX and MSCI World Auto Index) soon followed, which added to our conviction for a recovery in global PMI some ~3-4 months forward. Bond yields normalized, which led to short-covering in ‘value’ sectors like Financials and to a lesser extent, Materials. Energy is the last ‘value’ sector to recover based on poor supply/demand fundamentals, but the group is starting to show signs of life. Bond yields reflect market expectations of future inflation. Rising inflation generally leads to a positively sloped yield curve, which benefits banks who borrow short-term and lend long-term. Rising inflation also affords more pricing flexibility for commodity manufacturers. We’ve been writing about this for 3.5 months, but the majority of investors are just waking up to the fact that global manufacturing PMI has recently stabilized. It’s early and further improvement in manufacturing PMI is required before this becomes a durable cycle, but if/when it does, we could see surprisingly steep, low-volatility advance in cyclically sensitive growth stocks and severely under-owned value names. A perceived de-escalation in trade tensions was the initial spark, but monetary conditions are highly accommodative (very important), several economies have put fiscal stimulus measures in place (China in particular) and global manufacturing PMI inventory data suggests a potential significant boost from restocking if/when things get going.