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Stock markets are supposed to like bullish economic developments. The current market seems perplexed by them.
Tuesday's manufacturing purchasing managers' indexes (PMIs) from the world's two most important economies – the United States and China – were almost unequivocally good news. In the U.S., the Institute for Supply Management's (ISM) closely watched monthly manufacturing PMI was a higher-than-expected 55.7, a 28-month high. HSBC's manufacturing reading for China jumped to 50.1 in August, from 47.7 in July, moving into growth territory for the first time since May. (In PMIs, any reading above 50 denotes expansion of activity.)
At the same time, HSBC released manufacturing PMIs for 15 emerging-market countries – a key source of concern for in the current global equity market. Twelve of them showed improvement. And in Canada, Royal Bank of Canada's manufacturing PMI came in at 52.1, marking a fifth straight month of expansion in manufacturing activity.
Given that stock indexes have, historically, tracked trends in manufacturing PMIs pretty closely, these upturns in this key market indicator – especially in the U.S. and China – would normally be expected to light a fire under equities. Yet markets around the world received the news with a response that was mixed, at best. While Asian markets rallied on China's numbers, European and U.S. investors showed little excitement, as stocks actually declined after the ISM's report.
So what's the problem? You can spell it in three letters: Fed.
A strong PMI in the United States, coupled with signs of a healthier environment in key U.S. export markets, most assuredly strengthens the case for the Federal Reserve Board to start reducing its quantitative-easing (QE) monetary stimulus – something the stock market, which has developed an unhealthy addiction to QE, is in no hurry to see.
The market's trepidation about this policy move is not entirely irrational, even if it is too often knee-jerk. The U.S. recovery is still tentative, and the tepid corporate profits of the past quarters are evidence that companies are finding growth hard to come by. The fear is that if the Fed removes the monetary crutches too soon, the patient will keel over – and stock prices will come falling down.
Some mixed economic numbers earlier in the summer had raised hopes that the Fed might not begin its so-called "tapering" of its QE asset purchases in September (its policy-setting committee will announce its decision Sept. 18), as had been largely assumed; that hope had spurred an early-summer rally. But the sense lately has been that the economic numbers have been just good enough to keep the Fed on track to start tapering this month. The strong PMI numbers might almost seal the deal.
Almost, but not quite. The pivotal piece of the puzzle for the Fed will be this Friday's employment report. But with most indicators pointing to a strong month of job growth in August – economists' consensus estimate is an increase of a solid 180,000 – only a big downside surprise in the job numbers would likely take the Fed's eye off the tapering ball.
David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow him on Twitter at @parkinsonglobe .
David Parkinson