Jefferies: Global / Industrials:  Short Cycle Monitor: Strong but No Longer Growing

Key Takeaway

The Jefferies Diffusion Index of industrial markets was -2, following the +1 reading in February, even as we move one more end market into the Favorable category (transportation). The key leading indicators are also leaning weaker with three of the six softer MoM, albeit off very high levels. While end markets remain positive stock momentum has eased, reflective of the market pullback which has made valuations more compelling across industrials, in our view.

6 Leading Indicators; 11 Key End-Markets; Diffusion Index. Our six leading indicators were -1 in March compared to -3 last month and +4 in January. While the Diffusion Index posted a -2 for March the end markets we track remain skewed positively. Seven end markets now register as favorable (Transportation up from neutral), with three unfavorable (Ag, Infrastructure, and Asia), while Oil & Gas is the lone neutral, though momentum has been positive for the last few months.

What’s New this Month?

> Strategy comments on inflation: We see inflation moving broadly higher, with corresponding upside risk to interest rates. Large cap industrials are generally positively correlated with inflation, while the correlation for smaller caps is weaker.

> Raw Materials Inflation: Each of our analysts discusses the impact of raw materials costs on their respective sector. Most of us agree: costs will be passed through, albeit with a potential lag of a quarter or two.

Conclusion. This month’s SCM suggests that underlying industrial trrends are strong but perhaps no longer accelerating. All of our sectors save Steel underperformed the market over the last month. Valuations have pulled back most in Machinery and Building Products, where our favorite names on the pullback are PCAR, KMT, OC and MHK.

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