Taking 2016 as a whole, growth came in below expectations almost across the board – with the notable exception of China. However, as we start 2017, the global economy is performing better. In particular, after a period of stagnation, manufacturing data has markedly improved; the Markit-JP Morgan global manufacturing PMI rose to 52.7 in December implying the fastest pace of activity since February 2014. Indeed, Greece is currently the only developed nation with a manufacturing PMI below 50 (indicating contraction). This economic strength is relatively broad-based; aggregate economic data “surprise indices” are in positive territory for all regions and headline inflation is also generally rising (and not only because of higher oil prices).
Of course markets have already partly reflected the better data. The MSCI World has gained around 7.5% since the beginning of November, cash holdings for US mutual funds are at 5 year lows and the outperformance of cyclicals over defensives is at extreme levels. But the judgment for investors is not just tactical. There is obvious heightened political risk and great uncertainty as to how markets and the economy will be able to deal with any turn in the interest rate cycle.
As a starter, this Wednesday Donald Trump will hold his first news conference since his election, ahead of his 20th January inauguration.
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