Before anyone gets too worried about tighter monetary policy after the strong jobs report, first take a look at Thursday’s data on manufacturing.
The latest purchasing managers’ index signalled a November contraction in the US manufacturing sector. It marks the first time since June 2020 that the gauge has fallen below 50. (For those who don’t follow the data regularly, PMIs are based on surveys of company executives. Readings above 50 mean expansion, and vice versa.)
Barclays says the data point to a “material slowdown”:
Bank of America’s industrials and manufacturing analysts take an even dimmer view:
[The expansion] was fun while it lasted . . . In our 10/4/22 note, we argued that PMI could fall to around 35. This would be lower than the 39.0 average trough over the last four US recessions.
The manufacturing slowdown was fairly broad, with three of the five underlying components signalling a slowdown. From BofA:
The analysts’ recommendations match up with a lot of other banks’ themes for 2023. Buy quality, don’t buy non-quality, etc:
We recommend buying high-quality business models with backlogs, pricing power, and strong balance sheets. In our coverage this would include Buy-rated Honeywell (HON), Emerson (EMR), and Fortive (FTV). We would remain cautious on more cyclical, shorter-cycle stocks. We are less positive on high-quality but short cycle Neutral-rated Parker Hannifin (PH), Illinois Tool Works (ITW), and Ametek (AME). We also think investors are likely to be increasingly watchful around financial leverage (eg, Underperform-rated Vertiv (VRT) and Allegion (ALLE)).
There is one bright side to the poor US PMI data and dour forecasts, however. Some of it is the result of supply chains getting fixed, says BofA:
. . . the headline PMI includes a 20% weight on supplier deliveries and a 20% weight on manufacturers’ own inventory. Improving lead times will drag these two components through faster supplier deliveries and inventory normalisation. Lead times will also result in less advanced orders, dragging the new orders component (20% weight) of headline PMI.
Just in time for your Christmas orders of FT Alphaville merch!
