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Out of the Box #13: Services matter for central banks and Manufacturing for markets

If the service industry starts to fade relative to the Manufacturing sector, it may be exactly what central banks use as the excuse to pause (and eventually pivot) but markets are much more sensitive to Manufacturing PMIs.
2023-07-25

In our “out of the box” series, we aim at being ahead of the current consensus narrative and think of the next theme that could drive price action before anyone else has given it any noteworthy attention. This week we look at the spread between Service and Manufacturing momentum and why one matters for central banks and the other for markets (for now).

Our current working thesis is that Manufacturing (especially in the US, but maybe also elsewhere during Q3/Q4) will start to rebound short-term. Input costs have dropped as much as 50% in the supply chain for food, energy, and chemicals – and that is typically an early sign that production will pick up again as producers are able to lure back demand via lower output prices. Our most upbeat models have ISM Manufacturing at >55 by early Q1-2024.

We covered it extensively in our Business Cycle Week here.

Chart 1: Lower input costs -> higher production pace after a while

If the service industry starts to fade relative to the Manufacturing sector, it may be exactly what central banks use as the excuse to pause (and eventually pivot) but markets are much more sensitive to Manufacturing PMIs.

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