When looking at global Purchasing Manager Indexes it seems obvious that a strong recovery has now taken hold, a fact which looks even more remarkable considering the poor availability of credit in the U.S.
Monday’s report from the Institute of Supply Management indicated that October manufacturing activity in the U.S. was at the highest pace in three years. On an annualized basis, the number would translate to about 4.5% in real GDP growth.
The report also suggested that growth will remain strong into the fourth quarter and beyond since inventories are still contracting (albeit at a slower pace) as firms will likely need to ramp up production to replace depleted stocks.
Of special note in this report was the employment component, which jumped 6.9 percentage points in October to 53.1 (indicating expansion) from 46.2 in September. That number could imply a better-than-expected NFP on Friday, now expected to show a loss of 175,000 jobs.
The good news on manufacturing was not limited to the U.S. either; purchasing managers index reports from China, India, South Korea, Australia and Taiwan echoed figures over the weekend from Japan in confirming that a robust and widespread recovery appears to be under way. In Europe, the eurozone manufacturing PMI rose to 50.7, the first time it was above 50 in 17 months while manufacturing in the U.K. jumped from 49.9 in September to 53.7 in October, the third highest monthly rise on record.
Meanwhile, third quarter U.S. GDP numbers printed remarkable strong despite the fact that credit remains expensive for consumers even after all of the Fed’s efforts to lower borrowing costs, and the way to judge this is to look at the spreads.
For example, the rate on a five-year auto loan is 4.49 percentage points (or 449 basis points) higher than on a similar-maturity certificate of deposit (what a bank pays for deposits), up from an average of 2.05 percentage points in the five years through 2007. Also, the spread between jumbo 30-year mortgages and 10-year Treasuries average 2.71 percentage points, up from 1.58 percentage points in the same period.
What this implies is that should spreads narrow in 2010, a boost from consumer spending would kick in and cause GDP to grow even faster. Spreads however are likely to remain elevated for the time being due to constraints in the secondary market for securities backed by loans to consumers. About $126.8 billion of these securities were sold this year through mid-October whereas $231 billion worth was sold in 2007, according to data compiled by Bloomberg.
In the meantime, although I still believe in a longer term rally in stocks and that the dollar will be heading lower (especially against the euro and A$), I also think that in the shorter term we likely are heading for a bit of a bumpy patch. There are two reasons for this.
First was Monday’s price action after the ISM and Pending Home Sales reports printed far better than expected. The S&P moved nearly 1.50% higher before turning negative towards lunch time. Although it did finish the day with a gain, the move into negative territory really should never have happened off the strong data. The fact that it did tells me the market has the potential to decline on good news, which I take as a significant bearish sign.
The second point that has me concerned is the surge in trading volume on down days for stocks. On Friday, when the S&P lost 2.7%, volume was at a much higher than average 6.97 billion shares, the highest level since mid September, and similar volume play happened last Wednesday as well. Even more troubling was that while stocks did gain on Thursday off the GDP report, volume was only about average. The fact that there’s more trading participation when stocks head lower is another bearish sign that augers poorly for the short term.