Latest economic data suggests that the global economy is recovering from the brink of recession, but investors need to remain cautious as it’s too early to say that global recession is unlikely in 2016.
The chart below gives the global “Purchasing Managers Index” for the month of March 2016 and the composite PMI does indicate recovery after a big slump in the first two months of 2016.
However, data from China for April 2016 shows that recovery might still not be sustainable. The chart below gives China’s manufacturing PMI for April 2016 and the manufacturing sector has shown renewed weakness.
Importantly, the chart below gives China’s non-manufacturing PMI for April 2016 and after sharp recovery in March 2016, the non-manufacturing PMI has also cooled marginally. The data is however not alarming, but needs to be watched closely in the coming months.
I would also add here that the GDPNow indicator currently points to 1.7% GDP growth for the United States for 2Q16. The reading for May 4, 2016 is lower by 0.1% as compared to May 2, 2016. While it’s too early to estimate 2Q16 growth, I believe that real GDP growth will be much lower than 1.7%.
The 10-year Treasury yield, which is currently at 1.8%, is indicating that there are minimal prospects of rate hike in the foreseeable future and it also implies that economic activity remains sluggish.
From an investment perspective, I remain bullish on gold and I recently discussed five reasons to be bullish on the precious metal. If economic activity weakens further, there are reasons to believe that US policymakers will pursue renewed expansionary monetary policies and that can trigger rally for equities, but I expect a 10% to 15% correction before and liquidity driven rally. Bill Gross recently opined that “Helicopter Money” is imminent and I am in complete agreement with his opinion.