Overview
This week’s Chart Room highlights a significant shift in the findings of our latest monthly Analyst Survey: global management sentiment is improving while cost pressures are easing. Both indicators reinforce responses to our annual 2023 Analyst Survey that showed many of the companies we watch, invest, and interact with are growing more hopeful about emerging from the worst phase of the business cycle by the end of this year, as challenging as the next few quarters may be.
Sentiment improving
The sentiment indicator, which tracks the balance of analysts saying the mood amongst companies has improved against those who say it has worsened, is in positive territory for the first time in a year, and at its strongest since September 2021 when the US economy was successfully emerging from the worst ravages of the pandemic. Fears of recession on the horizon dominated the past 12 months, but the latest survey results show companies starting to look through the downturn to the light at the end of the tunnel.
Cost pressures easing (but mind labour)
Similarly, there is now clear relief arriving for companies around cost pressures. Non-labour input costs are still seen as increasing but the reading is now the lowest since early 2020. Conversely, there is more daylight between that and the labour costs reading, which remains stubbornly elevated.
Tenaciously high labour costs could be viewed as a reflection of a more buoyant than expected jobs market, as seen in the US in January’s strong nonfarm payroll data, and also in China as it emerges from years of zero Covid policy controls. But the cost numbers also provide food for thought: how will the conversation about wages in Europe be resolved? Or if prices do start to retreat outright - as our analysts report is already happening for materials and industrials companies on the cost side - what impact will that have on the year ahead for companies? It was only two years ago that the main policy concern for Western central bankers was deflation, not inflation.
Similarly, while the improvement in the sentiment and leading indicators is in line with some of the external measures most watched by markets, other metrics are still deep in negative territory and falling. If the contraction that some expect does materialise in the coming months, that sanguine sentiment among corporate managements is likely to be tested.
