The Institute for Supply Management's (ISM) December gauge of manufacturing activity moved to 50.9 for January. The strong reading was driven by strength in new orders which is a promising leading indicator. The number also beat analysts' consensus of 48.5, and December's 47.2.
This is the highest reading since July and marks the sector moving back into expansion mode. Analysts are attributing the reading to improvements following reductions in trade tensions between the US and China. Some reasons that manufacturing contracted for six months include the global growth cycle turning lower, the impact of the trade war, and Boeing's
Global Growth Turn Finally Arriving
The latest survey also resolves one persistent divergence between regional manufacturing surveys and Markit's manufacturing surveys which consistently showed that manufacturing had already bottomed, while the ISM trended lower. One explanation is that the ISM is dominated by large, multinationals, while regional Fed surveys and the Markit report pull from a wider variety of sources.
For months, many have been anticipating this as secondary indicators were showing low inventories and an increase in new orders which is correlated with increases in factory activity. Stock prices for cyclical stocks moved higher in the last six weeks of 2019 in anticipation of manufacturing bottoming as well. They had given up about 50% of these gains in 2020.
Current Situation
Going into 2020, the manufacturing stocks were vulnerable, as they had basically rallied in anticipation of a bottom that never materialized. Investors in the sector were optimistic due to expectations of the "phase 1" trade deal passing, the Fed's dovish stance, and the aforementioned leading indicators. Additionally, the global growth cycle had been turning lower since October 2018, so it was reasonable to expect a bottom or some sort of meaningful, countertrend trade.
Interestingly enough, all these catalysts did materialize, they just weren't significant enough to affect the trend. Additionally, new developments have muddied the picture even more. This includes the coronavirus outbreak and the Boeing 737MAX production issues.
The coronavirus outbreak is shutting down large parts of China, where manufacturing activity is concentrated. This will have unpredictable but temporary impacts on economic activity in the coming months. Similarly, the Boeing issue will have unpredictable effects on the headline reading and temporarily depress manufacturing.
In terms of financial markets, it will be interesting to see if current trends will be affected. Interest rates are moving lower, and growth-linked assets are moving lower as well. Financial markets are now anticipating a slowing economy and looser monetary policy. One way this can change is a meaningful upturn in growth which would lead to higher rates and mean-reversion in many of the current, predominant trends.
