Earnings revisions yet to signal growth peak

As previously discussed, global real narrow money is suggesting a peak in growth – as measured by the six-month rate of expansion of G7 plus emerging E7 industrial output – in May. Such a peak, however, has yet to be confirmed by a shorter-term leading indicator derived from the OECD’s country leading indices – next update on Monday.

A May peak in output momentum would be expected to be preceded by a top in purchasing managers’ manufacturing new orders indices, possibly in March or April. G7 PMI new orders fell back in February following a solid recovery in December / January. This raises the possibility that a slowdown is emerging earlier than suggested by the monetary runes.

Changes in equity analysts’ views about the earnings prospects of the companies they cover provide a higher frequency and more timely cross-check of the PMIs. The global “earnings revisions ratio” – the net number of analyst upgrades, expressed as a proportion of the number of forecasts – is strongly correlated with G7 PMI manufacturing new orders. The ratio retreated in January, signalling the February fall in PMI orders, but has since rebounded strongly, reaching its highest level for a year – see chart. The suggestion is that the February orders decline will be reversed in March.

Investors inclined to turn bearish in anticipation of an economic slowdown later in 2012 may be on the right track but risk missing out on further gains as near-term news remains relatively favourable and recent central bank liquidity injections filter into markets. The view here is neutral awaiting further monetary evidence – including important February Chinese data due shortly – and the leading indicator update.

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