How the German IFO and Manufacturing PMI Indicates Recession| Before & After | Refinitiv finance
This is before and after from Refinitiv. I am your host, Jamie McDonald. Today, we explore possible positions and plays in the German and in the US markets as we look at the upcoming German Ifo Business Climate Index and the US Markit Manufacturing PMI. Let's get right into our before segments. Produced by the Ifo Institute of Economic Research in Munich, the Ifo Business Index is a closely followed indicator of economic activity in Germany. Over the last two years this indicator has plummeted from a 20 year high to a 10 year low, last seen during the euro crisis of 2012. Long viewed as continental Europe's key economy, Germany has been reeling in the face of the global manufacturing slowdown and decline in auto sales. With their economic fortunes tied directly to global trade and with particular exposure to China's growth, we've already seen many key German economic metrics collapse. The PMI, which we've highlighted in previous episodes, is treading in recessionary territory. Even having bounced off their summer lows of minus seventy four basis points, German bund yields remain deeply entrenched in negative territory. Stocks in Germany, however, have been pricing a reflation trade, outperforming other key indices like the S&P and the FTSE 100. But with the DAX's scorching second half performance in 2019. An uptick in the Ifo business expectations number is needed to keep this momentum and show that the global manufacturing slump is beginning to turn. Our Refinitiv chart shows us that the DAX had been tracking Ifo business expectations until late 2019, when the index suddenly raced to the upside while expectations continued to plummet. Equity investors may have gotten ahead of themselves or maybe they are pricing for an imminent bounce in the data. Consider that an in-line reading will not move the needle because global equity markets are still in end of the year rally mode. Fear of missing out will continue to climb as the year grows short. A big miss and DAX investors maybe have a moment of clarity and profit taking begins. But if all the other global markets are still in their own risk on mode, profit taking on a poor figure will not last long. If investors are holding their breath awaiting the German business climate numbers, they will not be getting any relief waiting on the US manufacturing numbers. We spend a significant amount of time looking at manufacturing data from across the globe because it's the canary in the coal mine in every place that recession has taken hold and the US Markit manufacturing PMI is upcoming and worthy of investor focus. Unlike the more closely followed manufacturing ISM, the US Markit manufacturing, while having weakened, has held above the expansion contraction line of 50, recently bouncing off a low of 50.3. Investor fixation on manufacturing is justified because of the global slowdown across data points. It has even sparked a debate about which of the ISM and PMI is more valid. This data point will really matter if it confirms the ISM's drop below 50. Despite last month's firm 51.5 reading, the indicator is still flirting with danger and only implying 1.5% GDP growth at this level. To reiterate, 50 is the magic number with PMI. Above 50 and the economy is expanding below 50... not so good. 400 key private sector companies are surveyed on changes in business volumes such as output. There are no sentiment based questions or backward revisions. The number is the number. Last month's report of 51.5 put in a bottom on the US two year yield. That announcement on November the 1st saw a pop of 7 basis points, which is a significant move for the two year. The scenarios look like this a miss below 50 and most likely the entire month's yield rise evaporates in an instant and challenges the 1.5% level on the two year. A strong in-line number or higher would be well-received by a market concerned with damage to the real economy that trade tensions have set in motion. Reuters and other estimates are calling for a 51.4 to a 51.5 and this should see two year yields back above 1.6% building off the near-term rise. Future Fed actions are in the balance. So expect the bond market to react the most on this number as they try to guess the Fed's next move. A decent setup going into this number would be to go long the US banking sector via the XLF ETF. A miss would kill yields, especially short duration, potentially only steepening the yield curve, very bullish for banks and should have a limited effect on the stock market as a whole. While a strong number would be bullish for the broader market and those passive flows should mitigate any sector negativity. In Tuesdays before segments we outlined the difficulties that ThyssenKrupp was facing. The company had been underperforming the German DAX year to date. Even after the H2 rally, the stock is still 50 percent below its five year highs and its results won't do much to change that outlook. It is going to be a bumpy ride for CEO Martina Mertz, who only took the helm in October. The third CEO in the last two years, Mertz, announced that the company would suspend its dividend payment from next year and the share price promptly plummeted over 10 percent in the first few minutes of trading. Well, they are going to need to hold onto all the capital they can because Ms. Mertz also announced that the fiscal year losses to the end of September had widened to 304 million euros from 62 million euros the year before. These losses are only expected to worsen as the company will have to soak up yet another round of restructuring costs. Remember, they are already planning to sell off one of their crown jewels, the 16 billion a year elevator business, one of their few profitable arms in order to cover cash losses and their pension deficit. And the outlook is not good. Next year's free cash flow will probably drop below this year's already abysmal levels. We should expect this stock to underperform the broader DAX index. It may feel like we've missed a decent chunk of underperformance with the initial drop, but there's plenty more juice in this one given that the shares are still 30 percent above the 2019 lows. There have been nascent signs of a rebound within the broader German manufacturing base, hence the focus on the German Ifo earlier in the show. But this is a company that may not be able to benefit until a full restructuring or breakup has been completed. This has been before and after from Refinitiv. Be sure to like share, subscribe and hit the bell for notifications.