The US manufacturing ISM is currently at levels last seen before the 2008-09 recession. While this reflects the recent optimism about growth prospects in the US, we see several headwinds to the industrial sector.

The top-left chart shows the ISM against the VP Business Cycle Financing Index, which has turned down as a number of central banks have entered tightening cycles. Along with the Fed, the Bank of England and the Bank of Korea have begun hiking, and this increase to the cost of investment will be a headwind to manufacturing. The yield curve’s flattening over the last four years has been dragging the VP US Money Index lower (top-right chart; the Money Index looks at money growth and the yield curve), helped by a recent slowdown in money growth. Rising oil prices affect all sectors of the economy, but manufacturing is particularly vulnerable. The bottom-left chart shows a strong correlation between changes in the oil price and the ISM. Higher oil prices are headwind for the manufacturing sector.

Our stock/bond extreme sell signal is currently indicating that cyclical stocks are overbought. This can work as a fairly robust sell signal for cyclicals (bottom-right chart).

(Click on image to enlarge.)

Source: Bloomberg, Macrobond and Variant Perception