Tuesday’s day of atonement in equities caused by the misgivings of powerful bankers has turned out to be a short-lived affair. After all, their predictions were for a future correction which might occur withing the next 24 months, not on some random day in November and only lasting for 24-hours and some 1 to 2 percent at worst. To complain at the fickle nature of an investment world populated by an immense number of trading tourists is a futile affair and discounts how such behaviour must be adopted in the need to craft some sort of protection from politicians whose words can only be trusted when they are still warm on the breath. Or, as in this case, something else in our 24-hour span of attention pops up to supplant the previous driver.

Yesterday’s alternatives were the US ADP Employment private payrolls and ISM Services PMIs. The ADP data has grown in importance due to the US government shutdown meaning Non-Farm Payrolls and Unemployment cannot be produced. The headline increase of 42,000 jobs in October has led to the opinion in some quarters that there has been little change in the unemployment rate of 4.3% last seen in August, which while a notional judgement, soothes the anxiety markets felt after the recent comments from the Federal Reserve on its concern for the job space in the US. We touch on poor manufacturing below, but the ISM Non-Manufacturing PMI once again serves as balance and indicates how the world is so very much reliant on services for growth, particularly in the US with it being responsible for 60 percent of business activity. The PMI increased to 52.4, well in expansion, with the reading being one of the highest in the year-to-date. Warnings of incomplete data sets and slowdowns in orders and employment, have been paid little heed, with investors concentrating on the almost heroic headline growth in the survey.

Oil remains the anxiety hedge. There is also growing divergence between feedstock and refined products serving only to confuse the oil price path. Heading into refinery turnarounds and low stocks in products is made more acute by refinery damage in Russia and daily stories of more crude being available. Last week there were predictions on how Saudi Aramco were about to cut official selling prices (OSPs), that has become fact this morning with cuts into Asia ranging from between $1.20 and $1.40/barrel over the Oman/Dubai average. 

Manufacturing PMIs

It is sign of the times when the words of the great and the good of Wall Street have the ability to move markets more than any metric. At the Global Financial Leaders’ Investment Summit in Hong Kong and something he repeated in a Bloomberg interview, Goldman Sachs CEO, David Solomon warned on Tuesday of a 10 to 20 percent correction in equities within the next 12 or 24 months, backed up by Morgan Stanley CEO Ted Pick, speaking at the same panel, saying investors should welcome periodic pullbacks, calling them healthy developments rather than signs of crisis, according to CNBC. A dose of reality swept across the investment suite being none more exampled than the fortunes of Palantir. The A.I. expert company has surprisingly outpaced even darling Nvidia this year by threefold. Despite beating expectation and enjoying $1.18 billion revenue for the third quarter, the company’s current forward price-to-earnings ratio is 250. Nvidia, the highest valued company in the world, by contrast, has a forward p/e of 35. Such high and mighty paths, self-fed in how tech companies adopt round-robin investments in each other, could only be pulled down by the words of leading bankers, not industrial data. Yet, and however immune the tech industry is to the drab world of manufacturing, one wonders how long such ignorance might last or if indeed, warnings of correction are at last taking note of fading Purchasing Manger’s Indices.

Published at the start of each month, the PMIs are the harbingers of economic health enabling businesses to assess contraction or expansion for forward strategic planning and allowing investors a sneak preview on what GDPs might look like given the industrial activity of the previous month. The advantage enjoyed by PMIs over GDP is the latter is government reliant, normally quarterly, and often tardy in effective representations of nearby trends. Therefore, the spate of worrisome readings from Asia to America should be giving cause for concern. Starting with Japan, manufacturing slipped to a score of 48.2 and beneath the expansion limit of 50.0 for 4-straight months. The infill of the report highlighted a dive in semiconductor and automotive demand, a drop off again in new orders with exports a standout shallowing for 44-months on the bounce. In South Korea, S&P noted firms reporting contraction in both output and new order intakes and the only demand at present was from stockpiling of goods because of the recent hike in material prices. This has led to the readings of manufacturing PMIs falling in October to 49.4, with only 3 readings above 50.0 in the past 12 months. As for the most important Asian economy, China’s RatingDog China General Manufacturing PMI dramatically dropped month-on-month from 51.2 to 50.6 in October largely pulled lower by export orders. This follows on from the preceding official National Bureau of Statistics measure of 49.0, the worst contraction for 6 months. The final HCOB Eurozone Manufacturing PMI may well have ticked on the fence at 50.0 and up from 49.8 in September, but instead of offering hope the commentary within the survey told of stagnation. New orders remain in a slump which has been the case since the start of the Ukraine war, but worryingly, employment in manufacturing once again fell, a trend unchanged for over 2 years.

This at last brings us to an unerring copycat situation in the greatest and most important economy of all. The Institute of Supply Management (ISM), including it previous incarnations has been conducting business surveys of trading conditions since the early 1930s. The genesis of reports has a weighty history and reputation and has been the most eagerly followed by those who have interest in the state of the US economy, which frankly now is the whole of the globe’s population. Therefore, its October Manufacturing PMI report being equipped with the subheadings of ‘new orders contracting, production contracting, employment contracting and imports and exports contracting’, makes all sit up and pay attention. With a score of 48.7, it now adds up to 8-straight months of contraction bringing some analysts to include such wording as the situation being ‘dire’. In a separate Reuters poll, it found contraction in textile mills, wood and chemical products as well as electrical equipment, appliances and components, machinery, and computer and electronic products. This Administration’s idea of repatriating businesses is not holding up to scrutiny because the labour required is being deported and many firms show evidence that importing is still cheaper than taking on start up costs.

Donald Trump’s love of tariffs and trade confrontation is not finding success abroad or at home. It continues to nag at industrial confidence and forward planning in soft terms and in hard terms, this world of tariffs is making everything more expensive. It needs pointing out how warnings in manufacturing PMIs are nothing new, they have had abject readings for the years post-Covid, post-Ukraine and have been ignored by the rampant stock market bulls and often in oil due to possible blow ups in geopolitics. Whether or not they have any more relevance now lies in the remit of the Wall Street Warriors and the words they use in public. However, if there has ever been a consistent warning on how speculative investment continues to diverge from traditional fundamentals it comes from PMI reports, particularly those of manufacturing. PMIs will not reverse market sentiment, they lack the power to be a rally killer, but as with all markets, when confluence and convergence occur in data and sentiment, wild things sometimes happen.

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