There has been a persistent split between the performance of the weak global manufacturing sector and the much healthier service and consumer sectors. The slump in manufacturing and trade has overstated the economic risks, yet bond investors have tended to focus on key manufacturing indicators, such as the monthly PMI surveys.
The PMI manufacturing indexes have shown tentative signs of stabilizing. However, global bond markets have reacted as if a recovery is already underway, with yields up meaningfully since September. Paralleling the rebound in yields, global equity markets also have advanced solidly.
We have concluded that an actual recovery in manufacturing activity, and not just stabilization, will be needed to sustain the rebound in bond yields and equity prices, i.e. for the global stock/bond ratio to clear its 2018 peak. Such a move is probable providing trade tensions truly ease – stay tuned.