Global manufacturing accelerating, but not sufficient for stronger commodities

Leading indicators of manufacturing have again proven to be very strong, with momentum building in the US and Japan, while China and Europe remain in stable in positive territory. This is good news for industrial activity for the start of 2014, which is shaping up to be quite strong.

For commodities and metals in particular this is good news, although is not sufficient to guarantee prices will be better. Indeed, better leading indicators have only stabilised copper and aluminium has been disastrously weak.  Supply dynamics are clearly weighing heavily, with weaker momentum in China and Europe also important to copper.

The US ISM index was incredibly strong, with it clear that activity is genuinely gathering momentum rather the head-fakes in improvement we have seen in the last few years.

Markets are starting to bring forward the likelihood of tapering into the near future, although this hasn't rattled markets nearly as much as it did in September.  To be sure, the Fed seems to have a better anchor on when rates will rise than it did over that period.

Japanese manufacturing is also showing very strong gains, with a weak Yen starting to do more work.

It is interesting that momentum in Japan is much better than in Europe, where PMI's remain positive, although momentum is not so great.

Perhaps this highlights the importance of actions of central banks over just words.  While both have pledged to do "whatever it takes", the BoJ is aiming to grow the monetary base exponentially, while the ECB is only just starting to toy with the idea of zero-bound interest rates.  The relative benefits to activity of these approaches is clear in the chart on the left.

The PMI data for the western world is a very good leading indictor of industrial production and metals consumption.  But it is not divided evenly, with Europe a much bigger consumer of the metal (at least in the first instance of manufacturing, not accounting for goods that are exported).

This is important as while its clear that consumption is moving into positive territory, the relatively slower growth in Europe is a drag on the recovery.

Perhaps this will get dragged higher in the coming months along with global activity.  But it is worth waiting for clearer signs of this outcome.

The Chinese PMI data are perhaps not as useful a guide to manufacturing, but is still quite good. The flash estimates for the HSBC data were revised to flat with the official data also flat from last month.

So manufacturing in China looks pretty stable, which gels with the higher frequency steel production and coal consumption data discussed in this post.

For metals consumption, stable consumption is an ok result, but it looks like China will have to absorb an increasing amount of copper supply in particular over the balance of 2014, as discussed in this post.

So even though key leading indicators of consumption are currently pretty good, its doesn't appear to be good timing to be long copper at these levels.  Prices usually fall as China's call on global supply gets larger, which is likely to create more volatility and opportunity in the next 3-6 months.