Dr. David Allen
A close friend of mine, Soros Family Office alumnus and founder of Conduit Capital Jack Dwyer once said to me that the best way to anticipate the macro is to look at the micro…
Indeed, one of the leading indicators we watch at Plato are the monthly purchasing manager indices. These are compiled from granular surveys of supply-chain managers at private sector manufacturing firms. These managers buy the materials needed for the company to manufacture products and are an excellent gauge of changes in prevailing demand.
In the US for example, the PMI is based on surveys of over 400 companies across 19 industries. A reading above 50 indicates expansion, and a reading of less than 50 indicates contraction.
The heat map below shows country PMIs since March, 2021. European countries are shown at the top, followed by North America, Asia, Japan, and Emerging Markets at the bottom.
Business confidence is clearly beginning to slide in almost every country with PMIs now below 50 in the majority of countries compared to only two countries twelve months ago. The weakness is broad-based across developing and emerging markets.
How well though, does the PMI predict changes in GDP? The answer is, fortunately or unfortunately, depending on your perspective, quite well.
The below chart shows the US Manufacturing PMI overlaid with quarter on quarter changes in US GDP, clearly showing the leading behaviour of the purchasing managers index (which is also available far earlier than GDP figures). One might think we are not quite out of the woods yet!
The most interesting takeaway perhaps is that this does not necessarily mean equity markets will also slide. In fact, in inflationary times like these, softer economic data reduces the pressure on central banks to raise rates, which tends to drive equity markets higher as we have seen over the last two months.
About the Author
Dr David Allen is head of Short/Long Strategies at Plato, managing the Plato Global Net Zero Hedge Fund. He holds a PhD from Cambridge and Bachelor of Business with First Class Honours.
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