Overview
The Fidelity Leading Indicator continues to post robust readings, even as much of the developed world starts battling renewed infection waves. The FLI Cycle Tracker has stayed in the top-right corner, implying growth being above trend and accelerating. Quarterly growth momentum is the highest on record, while the year-on-year reading is now only marginally negative.
Recovery is broad-based, with every underlying sector experiencing faster three-month growth, although October’s momentum has weakened from the previous month. The FLI quantitative ‘bet’ continues to be positive on risk and short duration, at extremely elevated levels.
Business surveys moved further into expansionary territory, as both manufacturing and services PMIs held up globally, driven by outperformance in the US and China. Nevertheless, sentiment has weakened in the service sector with many developed countries re-imposing restrictive measures. This is evidenced by the Eurozone ‘bellwether’ surveys pointing to slower acceleration.
Consumer and Labour remains reassuringly solid. Consumer confidence extended a rally through October, staying high across developed markets for now despite a resurge in virus threats. The labour market tea leaves are also looking healthier, especially in the US, with unemployment claims declining at a rapid pace.
Industrial Orders are seeing strong acceleration across all geographical regions after some weakness during the summer months. Inventory to sales ratios look encouraging in the US, while Japan is pointing to a potential restocking of the inventory cycle. German New Foreign Orders remain strong, reinforcing the resilience of the European manufacturing sector seen in business surveys.
Global Trade is showing some loss of momentum after a tremendous run. Soft data remains strong, but hard data on Korean exports edged down from the September highs. Semiconductor exports, a bellwether for the global tech cycle, have been essentially flat all year, while auto-related trade has risen back to pre-COVID levels. The Baltic Dry index, which tracks shipping costs, is showing signs of peaking, but survey-based measures continue to improve.
The record quarterly FLI reading suggests that the global economy may have enough strength to weather slowdown over the coming months, even if momentum is showing signs of peaking. However, with activity still below year-ago levels, a sustained slowdown from here would have a lasting negative impact. While the uncertainty over the US election appears to be behind us, doubts over the size (or even existence of) renewed fiscal stimulus remain.
A gridlocked Congress raises the likelihood of a limited fiscal impulse in 2021, with monetary policy yet again required to do the heavy lifting. Even more important is the news that we appear to have at least one effective COVID vaccine, to be rolled out next year according to Pfizer’s recent announcement. This is a necessary component of a 2021 recovery, but it’s not enough - manufacturing, rollout logistics, and the trial results from other vaccine candidates all need to go well for a full-throated recovery.
The coming weeks will likely see a tug-of-war between: resurgent infections in many developed nations, including the US, Canada, and possibly even Japan; the success (or otherwise) of European nations bending their COVID curves without strangling activity further; and potentially additional Phase 3 vaccine trial readouts.
