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The JPMorgan Global Manufacturing Purchasing Managers Index (PMI) is the most important economic data point for mining sector investors, in my opinion. The most recent release, on June 2, points to short-term weakness for metals prices and mining stocks.

The JPMorgan Global Manufacturing PMI is a composite index that compiles surveys of prominent manufacturing company executives from across the world. The survey includes a series of questions including hiring expectations, prices, orders from customers and order backlogs, as well as current levels of activity.

The responses are limited to a scale of “higher,” “lower” or “the same” for each question. An index reading of 50 indicates no change and levels above 50 indicate an increasing pace of business. The result for May came in at a healthy 53.1.

In providing a global view of the resource-intensive portions of the economy, the index is an important indicator for base metals demand. The accompanying chart highlights this by illustrating that the year-over-year change in metals prices has been closely tracking the change in global manufacturing PMIs.

The problem for mining investors is not current levels of manufacturing activity – they’re fine – it’s that the rate of improvement is slowing. From February, 2016, to February, 2017, the PMI index jumped 6 per cent from low levels. Metals prices as measured by the S&P/GSCI industrial metals index rose 29 per cent for the same period.

RECENT DIVERGENCE

S&P/GSCI Industrial Metals Index

year-over-year (left scale)

JPMorgan Global Manufacturing PMI

year-over-year (right scale)

50%

8%

40

6

30

4

20

2

10

0

0

-10

-2

-20

-4

-30

-40

-6

2013

2014

2015

2016

2017

2018

THE GLOBE AND MAIL, SOURCE: SCOTT BARLOW

RECENT DIVERGENCE

S&P/GSCI Industrial Metals Index

year-over-year (left scale)

JPMorgan Global Manufacturing PMI

year-over-year (right scale)

50%

8%

40

6

30

4

20

2

10

0

0

-10

-2

-20

-4

-30

-40

-6

2013

2014

2015

2016

2017

2018

THE GLOBE AND MAIL, SOURCE: SCOTT BARLOW

RECENT DIVERGENCE

S&P/GSCI Industrial Metals Index year-over-year (left scale)

JPMorgan Global Manufacturing PMI year-over-year (right scale)

50%

8%

40

6

30

4

20

2

10

0

0

-10

-2

-20

-4

-30

-40

-6

2013

2014

2015

2016

2017

2018

THE GLOBE AND MAIL, SOURCE: SCOTT BARLOW

From that point, the acceleration in global manufacturing activity tailed off. The results for May were barely positive compared with 2017 at 1 per cent. Metals prices, however, were higher by 22.8 per cent and this strong appreciation has created a divergence that began in March.

Previous patterns suggest that unless manufacturing activity reaccelerates, growth in metals prices is set to slow and provide headwinds for mining stocks.

The JPMorgan index is clearly important for commodity-focused investors, but it’s also strategically relevant for equity investors with non-resource portfolios.

The ongoing moderation in the global economy supports the forecasts of Morgan Stanley strategists Andrew Sheets and Michael Wilson, who expect both economic growth and corporate profit margins to peak in the middle of this year. Mr. Sheets and Mr. Wilson believe that PMIs and other indicators of global growth will continue to fade, paving the way for a return to lower bond yields and outperformance for defensive, dividend-paying equity sectors.

Scott Barlow, Globe Investor’s in-house market strategist, writes exclusively for our subscribers at Inside the Market.

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