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Hard landing watch: full PMI results, OECD G7 leading indicator

07 novembre 2023 par Simon Ward

The global composite PMI new orders index fell from 49.5 in September to 49.3 in October, extending a decline from a local peak in May. Recent weakness was signalled by a fall in six-month real narrow money momentum, which reached a new low in September, suggesting a further PMI decline into end-Q1 – see chart 1.

Chart 1

Chart 1 showing Global Composite PMI New Orders & G7 + E7 Real Narrow Money (% 6m)

The new orders index is 1 standard deviation below its historical average, consistent with slow global GDP expansion – chart 2.

Chart 2

Chart 2 showing G7 + E7 GDP (% qoq annualized) & Global Composite PMI New Orders

The index would need to fall to 46-47 to signal a full-blown global recession. The current level, however, is weak enough to suggest “hard landings” in selected economies. It is, for example, below the low reached in 2012 during the Eurozone recession / financial crisis.

The October fall in the index was again driven by services new business, with manufacturing new orders extending a minor recovery since July – chart 3.

Chart 3

Chart 3 showing Global PMI New Orders / Business

The suggestion here has been that manufacturing would receive support from a lessening of a drag from the stockbuilding cycle but a recovery was likely to prove modest and temporary, reflecting offsetting weakness in final demand.

The small further rise in global manufacturing PMI new orders in October was not mirrored by output expectations or US ISM manufacturing new orders, both of which reversed lower – chart 4.

Chart 4

Chart 4 showing Global Manufacturing PMI New Orders & Global Manufacturing PMI Future Output / US ISM Manufacturing New Orders* *Adjusted to Equalise Mean & Standard Deviation with Global Manufacturing PMI New Orders

The possibility that manufacturing is on the brink of renewed weakness is tentatively supported by the OECD’s G7 leading indicator. The rate of change of the indicator* appears to be inflecting lower and has led peaks and troughs in global manufacturing PMI new orders historically – chart 5.

Chart 5

Chart 5 showing Global Manufacturing PMI New Orders & G7 OECD Leading Indicator

The above evidence casts doubt on last week’s strong rally in equity market cyclical sectors, apparently due to rising rate peak / soft landing hopes. The rate of change of the leading indicator has correlated with the relative performance of cyclical sectors historically, suggesting cyclical underperformance if the momentum reversal is confirmed – chart 6.

Chart 6

Chart 6 showing G7 OECD Leading Indicator (% 6m) & MSCI World Cyclical Sectors ex Tech* Relative to Defensive Sectors (% 6m) *Tech = IT & Communication Services

Verdict: consistent with developing hard landing.

*The indicator is calculated independently using the OECD’s historical methodology, i.e. excluding a temporary reduction in data smoothing applied by statisticians in 2020 in response to the covid shock.

Groupe financier Connor, Clark & Lunn Ltée
novembre 7th, 2023