The global stockbuilding (inventory) cycle is judged here to have bottomed in H1 2020, probably Q1. The cycle acted as a drag on global economic momentum in 2018-19 but is now scheduled to provide a tailwind at least through end-2021.

Reasons for believing that Q1 marked the trough include:

1. A low was due – the cycle has averaged 3.5 years and last reached a trough in early 2016.
2. The negative contribution of stockbuilding to G7 annual GDP growth in Q1 was large enough to be consistent with a cycle low – see first chart.
3. A timely monthly indicator derived from G7 business surveys firmed in Q2, reaching a 13-month high in June – first chart.

A weakness of the analysis is that it excludes China, the largest industrial economy. Chinese industrial output has rebounded more strongly than retail sales, raising the possibility that stock levels have increased significantly, in turn suggesting that an inventory correction in China could offset a recovery in the G7 cycle.

China does not release quarterly national accounts inventories data but a business survey indicator can be constructed along the same lines as for the G7. This indicator has reached peaks and troughs around the same time as the G7 indicator, consistent with the stockbuilding cycle being global – second chart.

The Chinese indicator reached a low in February – further evidence that the global cycle troughed in Q1. It spiked higher in March / April, probably reflecting the production side of the economy reopening ahead of demand, but returned to negative territory in May / June.

The indicator, therefore, does not support claims of a significant inventory overhang. G7 and Chinese stockbuilding cycles appear aligned and should have reinforcing effects on global economic momentum in H2 2020 and 2021.

Global six-month real money growth – on both narrow and broad definitions – is estimated to have risen to another post-WW2 high in June, based on data for the US, China, Japan, Brazil and India, which have a combined two-thirds weighting in the G7 plus E7 aggregates calculated here.

A global leading indicator derived from the OECD’s country leading indicators usually mirrors monetary swings with a lag and posted a second large monthly rise in June, confirming an April low – second chart. The OECD indicators exclude money for most countries so represent an independent cross-check.

The equity analysts’ weekly revisions ratio, meanwhile, has normalised, consistent with the global manufacturing PMI new orders index rising further to 50-55 in July – third chart.

An April low in global economic momentum coincided with a low in the relative performance of “old economy” cyclical equity market sectors (i.e. materials, industrials, consumer discretionary, financials and real estate) versus defensive sectors (i.e. consumer staples, energy, health care and utilities) – fourth chart.

This old economy cyclical / defensive sector relative has exhibited a significant correlation historically with the US 10-year Treasury yield – fifth chart (correlation coefficient = 0.92 over 1995-2019). The recovery in the relative since April has opened up a wide divergence with a static yield, suggesting that one or other market is mispriced – monetary trends argue bonds.