Is Correction Risk Rising? Our Latest Views on the Manufacturing Cycle

Dear all,

Global equity markets delivered mixed performance in October. After a significant policy-driven rally in September, Chinese and Hong Kong stocks edged lower in October. Meanwhile, U.S. equities remained relatively stable, with the S&P 500 and Dow Jones reaching new highs at one point. Both the U.S. dollar and Treasury yields rebounded, reflecting increased market confidence in a soft landing for the U.S. economy as well as the “Trump trade” sentiment (expectations that a Trump victory could drive U.S. debt higher, more on this below). In the commodities space, weakness in oil prices remained, redirecting fund flows and pushing gold to new highs.

As we approach year-end, it’s a good time to review where the manufacturing cycle currently stands. We've been highlighting since mid-last year that the manufacturing cycle had entered an upswing, with growth accelerating in the first half of this year. We've also noted the need to start watching for a downturn going into Q4, and we believe this is indeed happening. The MM Manufacturing Cycle Index has been declining for 4 consecutive months, amplifying stock market volatility. Based on the data available, we can now assess the characteristics of this manufacturing cycle. Is it facing a steep decline, or a more moderate adjustment? What could this mean for the broader market? The analysis below highlights three defining features of this cycle.

I. Continued & Significant Sectoral & Regional Divergence

A key feature of the ongoing manufacturing cycle is the pronounced divergence across regions and sectors. On a regional level, PMI readings reflect considerable variation: while India’s PMI has remained above the 50 baseline for 39 consecutive months, the U.S. and China hover around 50, and the Eurozone and Japan have not exceeded the 50 baseline so far in the cycle. The divergence is obvious on the sector level as well. For example, if we look at U.S. durable goods orders by product category, many sectors have not seen much of an upward trend over the past one or two years. Uneven performance is also observed between exports of ICT products and electronic components from Taiwan, which are data points we frequently monitor. While AI-driven demand has fueled steady growth in ICT exports over the past two years, consumer electronics (represented by electronic component exports) have seen almost no upward movement, and traditional sectors that are more heavily influenced by China have been even weaker.

The trends above underscore an interesting phenomenon: As some sectors did not see a robust uptrend during the past two years of manufacturing upswing, as the cycle enters a downturn, these sectors are finding support from their low bases. This also explains why Taiwan’s exports can maintain single-digit growth despite the cyclical downturn. As shown in the chart about the semiconductor cycle below, the U.S. and Asia-Pacific have been benefiting from strong tech product demand, while Europe and Japan, starting from low baselines, are just starting to move upward. As a result, annual growth in global chip sales have managed to reach new highs, despite pressures emerging over the past quarter.

II. AI Demand Proves Resilient as Inventory Levels Remain Low

Whether the current growth pace can be sustained still largely depends on the strength of AI demand. From the Industry Intelligence Hub we’re launching in early November, we can see that Nvidia’s days inventory remain at very low levels, unlike the significant increase seen in 2022 when the industry entered the destocking phase. This suggests that ...

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