Everyone talks about the economic impact of the coronavirus crisis. Economies were shut down across the world and reopened months later. As people began working and traveling more, the infection rate bounced too. What will come next – economies learning to deal with the virus or new lockdowns?
Assuming no new lockdowns will happen, the economic activity will continue to improve. After all, the good thing from being knocked down to the floor is that there is no other way to go but up. What if the stock market’s rally points to upbeat economic recovery? What if the economies will bounce faster than many anticipated at the start of the crisis? Encouraging signs exist, but investors should remain cautious.
World’s PMI Manufacturing Recovering
The PMIs are in the front line of indicating a potential reversal. In times of crisis, investors and traders turn their attention to the PMIs as they usually point faster to a possible recovery. After all, it is only about sentiment, a survey about improving conditions. For instance, for a PMI to print higher than 70, you need three out of four surveyed subjects to note an improvement in economic conditions. Again, when you are down, such a statistic is not impossible to see – in fact, it is quite likely.
However, higher PMIs than normal, or much higher than the 50 level should be taken with a grain of salt. It matters a great deal the level that the economies are bouncing from.
Judging only by the PMIs, most regions recovered rapidly – E.U. – 51.8, emerging economies – 51.4, U.S. – 50. The end of the week will bring more data regarding the PMI evolution in the Eurozone, seen as having better managed the crisis so far.
But if the world’s PMIs truly point to economic recovery – global one – then the yields on the 10y Treasury bond do not match the overall picture. They are too low. There is a strong, direct correlation between the world’s PMI as the 10y Treasury yield. At the current PMI levels, the yield should be above 1.5%, instead of being so depressed.
In other words, any reversal of the USD is a sign of economic recovery. The USD fell in response to the fiscal and monetary stimulus, leading to the global economic bounce we see. It helped the economies to turn the corner.
A higher USD and continued improvements on the economic front are what investors need. The two come as a confirmation that the economic recovery is not just a bounce – but the start of a solid trend.