Jeroen Blokland

The ISM Manufacturing Index is not only an important indicator of future growth, but is also highly correlated with market returns. What many investors overlook: it’s not just correlated with equity returns, but also bonds.

By using indicators that say something about the direction of the ISM Manufacturing Index to define different ISM scenarios, you can derive implied returns for each asset class.

European financials are in the spotlight again. And once again, it is not because of anything good. The CDS spread on Credit Suisse has spurted up over the past few days. Is this just the tip of the iceberg? Many “investors” and “gurus” are eager to point out possible systemic risk. At least as far as I can see, there is none of that right now.

UK financial markets are in “turmoil”. This somewhat CNBC-esque opening, however, covers it well. And it has resulted in a chart that usually belongs to an emerging economy on the verge of collapse. The British pound is falling despite rapidly rising interest rates.

After consistently recording fat pluses over the past decade, the euro area’s trade balance has sunk deep into the red. For years, international trade contributed substantially to economic growth in the euro area. But: “Das war einmal”.

A historic surge in expensive energy imports now that gas supplies from Russia have been completely cut off results in a heavily negative trade balance. As a result, trade is now dragging down growth and pushing up the already sky-high risk of recession further.

Activity in the US housing market is rapidly declining. New home sales fell more than 12 per cent in July, the biggest drop since February last year. It was also the sixth decline in seven months. Compared to the peak, 51 per cent fewer new homes were sold.

In retrospect, we can say that central banks used the annual Jackson Hole symposium to revive their credibility as inflation fighters. This also applies to the ECB.

After yet another higher-than-expected inflation rate - we are now at 9.1 percent - and core inflation at a new record of 4.3 per cent, the ECB Governing Council on Thursday has adopted a record interest rate hike of 75 basis points.

With China using interest rates again to defuse the property crisis, and the Federal Reserve making clear in Jackson Hole that it will continue to tighten, the divergence in central bank policy between the two largest economies is increasing. This is not good news for the yuan, emerging market currencies and equities.

It was a huge shock. The 37.2 percent increase in German producer prices, or PPI, for July that the Statistisches Bundesamt announced last week. Not only was this the biggest price increase ever, it was also more than five percentage points higher than the consensus expected.

Moreover, this number came before reports of the 50 percent increase in German electricity prices so far in August. And so the question arises, should we be getting ready for a German inflation, or CPI, of over 10 percent?

Valuation is often not the immediate trigger for a stock market turnaround. But it is a decisive factor in the amount of upward or downward potential for the market.

Re-rating

Since its low point in mid-June, the S&P 500 Index has risen 18 per cent. Over the same period, earnings per share rose by less than 2 per cent. There has thus been a considerable re-rating of equities over the past two months.

The US macro data show a mixed picture. GDP – before revisions at least –  has contracted for two quarters in a row. For Europeans, that is a recession.

The ISM Manufacturing index fell further, but is still above 50. ISM Services unexpectedly rose to 56.7. More than half a million jobs were added in July. And yet it has felt like a recession for a while.