With market analysts twisting themselves in knots trying to decipher the latest report on US-China trade negotiations, smart traders are following the clear economic data, notes Landon Whaley.

For the second straight week I decided to club you over the head with data to make sure you stay focused on what truly matters, rather than the on-again/off-again trade deal.

We track thousands of data sets globally, but few provide better insight into economic growth while also providing a true apples-to-apples comparisons across economies like the global manufacturing PMI surveys.

For the uninitiated, the critical threshold in a PMI report is the 50.0 level. If an economy’s PMI is above 50.0, then growth is expanding and below 50.0 its contracting. Given this bifurcation, there are four possible PMI scenarios, and each one tells us something different about the trajectory of growth, and as importantly, the likely central bank policy response to current economic conditions.

A PMI reading that is greater than 50 and accelerating month-after-month says the underlying economy is in a Spring or Summer Fundamental Gravity, and central bankers just need to sit on their hands and not screw it up. Based on September global PMI data, Brazil, Canada, Columbia, and Denmark fall into this particular PMI camp.

Scenario two is an expansionary reading above 50, but with a multi-month downtrend indicating that the expansion is steadily losing steam. In this PMI environment, the economy is doing just fine, but you start hearing rumblings that the central bank may need to step in to keep growth pointed in the right direction and everything humming along, economically speaking. Based on the latest reports, Australia, France, Greece, and Hungary fit this bill.

Once you drop below the magic 50 mark, the PMI is indicating an outright contraction in growth.

In scenario three, the PMI is contracting but has also been declining for several months. This environment characterizes an economy that is pure guano where investors are clamoring for central bankers to cry dovish and let the rate cut juice loose. The economies currently facing this PMI scenario are the United States, Eurozone, Germany, Italy, Japan, Poland, Russia, Singapore, South Africa, South Korea, Spain, Sweden, and Switzerland.

Which brings us to our fourth and final PMI scenario, an economy that is in contraction, but is making its way back up towards the 50 level. Against this economic backdrop, growth has found a floor, and with continued monetary policy support, it will likely accelerate back into expansion territory. The economies most likely to see their first growth accelerating regime in quite some time are Hong Kong, Indonesia, Ireland, Malaysia, Mexico, and the United Kingdom.

In aggregate, the manufacturing PMI data shows that 30% of economies are expanding, while 70% are in contraction. The reports also show that 63% of economies are in multi-month PMI declines, and nearly half (48%) of the economies analyzed are in contractionary environments that are getting worse with each passing month.

More importantly, in terms of global GDP, the PMI scenario breakdown paints a vivid picture:

  • PMI Scenario #1: “Everything is Awesome” = 4 countries representing just 5.0% of global GDP
  • PMI Scenario #2: “Everything is Irie” = 4 economies representing only 5.2% of global GDP
  • PMI Scenario #3: “Everything is Guano” = 13 countries accounting for over 67.1% of global GDP
  • PMI Scenario #4: “I’ve fallen, but I’ve gotten back up” = 6 economies accounting for 7.2% of global growth.

Despite White House trade advisor Peter Navarro’s belief that “Manufacturing is as strong as a rock,” the manufacturing PMI math is straight forward, and it equals a Global Winter Fundamental Gravity. Trade accordingly.

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