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Manufacturing data send worrisome signal about stocks

Manufacturing sales declined 0.4 per cent in June.

Deborah Baic/The Globe and Mail

A global economic slowdown has become a verifiable fact after the release of manufacturing data over the past month. The economic soft patch, emanating initially from Europe, has depressed growth numbers across the globe.

Thursday morning's StatsCan report on Canadian manufacturing activity indicates that the effects of Europe's woes have now reached the domestic economy. Manufacturing was expected to climb 0.3 per cent for June, but was posted at -0.4 after a flat reading for May.

History shows a clear relationship between earnings estimates for Canadian resource companies and China's manufacturing growth. As a result, the Chinese PMI Manufacturing Index is likely to provide the clearest sign of troubles ahead for Canadian equities and the broader domestic economy.

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The PMI Manufacturing Survey is a series of questions regarding hiring, new orders, inventories and costs for major corporations. A level of 50 indicates no change, readings above 50 indicate expansion of activity. China's PMI manufacturing index has seen a steady decline from the 2010 high of 55.2 to a recent 50.1 reading that indicates an economic standstill.

The Chinese PMI survey provided early warning for investors in the lead up to the financial crisis, plunging from 59.2 to 41.2 between May and December 2008. Stock values in the Canadian diversified mining sector followed lower shortly after.

A recovery in China's PMI also provided an early buy signal in December 2008, beginning a sharp recovery that led mining stocks higher by 477% to March of 2010.

PMI data also provide early indications for the analyst profit estimates that underlie stock values, an important factor as 2013 profit estimates are now being reviewed.

If lacklustre PMI numbers persist, it is highly unlikely that a sustainable recovery in Canadian equity markets can begin. (see chart in the infographic above, which uses Bloomberg data)

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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