The GDP-weighted average PMI for the big-8 economies (US, UK, Euro Zone, Japan, China, Brazil, Russia, India) is rising strongly. When the Iran War began, all the country commentary by S&P Global emphasised the stock (inventory) building by manufacturers responding to the imminent rise in prices caused by the war. At the time, I thought this would only last a month, and it would then peter out. I was wrong. Raised inventories led to increased orders, which led into turn to increased production and still further increases in targeted inventory levels — a classic inventory cycle. The surge has lasted a lot longer than one or two months.
The commentary now, at country level, is invariably about rising input, and sometimes, also selling prices.
For Central Bankers, looking for clues about prospective inflation, these are red flags. Add to that the strong jump in PMIs, and you can see why CBs have been raising interest rates (see lower chart).
My fear is that this is precisely at the wrong time, because the AI bubble is bursting, and that will bring down growth in the US and other countries. If we add rising interest rates to this mix, we risk a deep and sharp recession. Am I certain the AI bubble is bursting? Yes. Do I believe CBs will raise interest rates again? Not so certain, but I think the risk is high. It depends on how sharply (if) stock markets fall and private credit flows dry up.
The US election makes a sort of peace with Iran more likely, and oil prices have prolly peaked, which is good news for economies and (eventually) inflation. However, CBs have a tendency to wait too long and then to overdo it when they finally move. A period of risks for economies and markets lies ahead.
[Reminder: This is not financial advice. Discuss any major investment decisions with your financial planner first.]
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