Industrial activity around the world looks set to strengthen smartly in the months ahead, at least if the latest batch manufacturing purchasing managers indices (PMI) are anything to go by.
Continuing the trend established in the middle of last year, perceived activity levels continued to improve in March with the JP Morgan-IHS Markit Global Manufacturing PMI holding steady at 53.0, indicating that momentum across the sector is continuing to build.
It’s worthwhile remembering that a PMI reading of 50 indicates that activity levels were unchanged from a month earlier, with anything above 50 pointing to improvement in conditions.
And, distinguishing this recovery from those seen previously, it’s not only being driven by one region or country to the detriment of others that was the case in the past, but most major manufacturing nations.
That’s demonstrated in the chart below from Macquarie Bank.
It shows the manufacturing PMI for individual nations in March, distinguishing them by the size as the size of manufacturing sector.
Three of the dots clearly stand out: the USA, eurozone and China, the largest manufacturing regions in the world.
They all sit in the right-hand side of the chart, indicating that activity levels all improved at varying degrees in March. While activity levels improved at a slower pace in the United States, indicated by the nation sitting in the bottom half of the chart, those for the eurozone and China both improved from a month earlier.
These are the largest manufacturing nations and regions in the world, and largely explain the strength in the global manufacturing PMI in March.
And, as seen below, that improvement not only occurred in March, but also over the past year.
It’s the same chart from above, only looking at the change in individual PMIs from March 2016.
Yet again, all of the big boppers have seen activity levels strengthen, along with the vast majority of other nations. Only Brazil and South Korea have seen activity levels weaken, and in the case of the former, the scale of the decline has narrowed.
It all points to an upwsing in the global industrial sector, and, given its sheer size, the global economy.
But can it be trusted? PMIs are, after all, sentiment indicators, only measuring perceived changes in activity levels.
It’s a soft economic indicator, not a hard indicator measuring on what’s actually happening on the ground.
Well, if this third and final chart from Macquarie is anything to go by, the recent upswing in the global PMI bodes well for actual activity levels, and, as a consequence, global commodity demand.
It tracks movements in the global PMI to the year-on-year change in global manufacturing and industrial output on a three-month moving average basis, remembering that the PMI is released well in advance of the other data.
If the relationship is maintained — and there’s little reason to think it won’t given the past relationship — it points to further strengthening in global industrial activity in data yet to be released.
“The global industrial recovery seems on solid ground,” says Macquarie. “This data remains a clear positive for metals demand and a remarkable turnaround over the past 12 months.”
If that’s the case, it should also help to alleviate building concerns in financial markets that the “reflation trade” that has driven stocks and commodities higher, and bonds lower, since the US presidential election was not built on hope and hype, but rather a true improvement in the global economy.
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