The Purchasing Managers’ Index (PMI) is an economic indicator used to measure the health and activity level of a specific sector of an economy, namely the manufacturing or services sectors. 

PMI data is published on a monthly basis and is of three types:

1. Manufacturing PMI: This is the most well-known type of PMI. It measures the health of the manufacturing sector within an economy. The index is derived from surveys of purchasing managers at manufacturing companies and covers aspects like production, new orders, employment, supplier deliveries, and inventories. 
2. Services PMI: This measures the performance of the services sector, which includes industries like finance, healthcare, retail, education, and more. The services PMI considers factors such as business activity, new orders, employment, and business expectations.
3. Composite PMI: The composite PMI combines both the manufacturing and services PMI data to provide a broader picture of the overall economic activity in a country. This can be particularly useful for assessing the overall health of the economy. 

It provides insight into whether a sector is expanding or contracting by examining various business activity components. PMI is a widely recognised and followed indicator that helps analysts, policymakers, and investors assess the overall economic conditions.

The PMI can be viewed as a timely and forward-looking indicator, reflecting overall current economic conditions and provides insights into potential future trends.

Here’s how the PMI works:

1. Data Collection: Surveys are conducted among purchasing managers from a representative sample of companies in the chosen sector. These managers are responsible for making procurement decisions, which often provides insight into the current state of economic activity.
2. Components: The PMI survey typically includes questions about various aspects of business activity, such as new orders, production output, employment, supplier deliveries, and inventory levels. Respondents indicate whether these components are expanding, contracting, or staying the same.
3. Scoring System: Each component of the survey is assigned a score. A score above 50 generally indicates expansion or growth in that component, while a score below 50 indicates contraction. A score of exactly 50 suggests no change.
4. Calculation of the final PMI: The scores of various components are aggregated to calculate the overall PMI. If the majority of components show expansion, the PMI will be above 50; if the majority show contraction, the PMI will be below 50.
5. Sub-Indices: In addition to the overall PMI, sub-indices might provide insights into specific components like new orders, production, employment, and more.

 

PMI – The Market Response

The market response to PMI (Purchasing Managers’ Index) data can be quite significant and can impact various financial asset classes. 

As with any economic data, the market response to PMI releases will be largely dependent on the consensus estimates of each of the numbers (with are theoretically priced into markets to some degree) against the actual numbers released, and how close this is to estimates. 

A figure that is wide of the mark compared to expectations is likely to produce a more severe market response.

The response depends on several factors, including the direction of the PMI reading, the sector being measured, the overall economic context, the global significance of the country relevant country (e.g. US PMI may have more global market  impact) and underlying market sentiment. Although the exact impact will be dependent on the PMI in the overall economic context, generally speaking the following may be some of the common responses. 

 

• General asset classes

1. Equity Markets: A PMI reading above 50 is generally seen as a sign of economic expansion and growth. In the event of a better than expected number, this can lead to increased investor confidence in the market’s overall health, potentially driving stock prices higher.  A number less than expected and/or below 50 is likely as with this and those assets classes below to have the reverse impact,
2. Currency Markets: In the foreign exchange market, a strong PMI reading can strengthen the currency of the country due to increased confidence in its economic outlook, and in interest sensitive environments may encourage central bank action potentially.
3. Commodity Markets: A positive PMI may signal increased demand for raw materials and resources, potentially boosting commodity prices, notably base metals and oil. Again, the country for which the PMI is released is relevant with a global impact on commodity prices only with the major manufacturing economies e.g.  US and China. 

• Impact on Interest Rates:

Central banks often closely monitor PMI data as part of their decision-making process regarding interest rates. A strong PMI might suggest an economy is heating up, potentially leading to discussions of tightening monetary policy (raising interest rates) to reduce the likelihood of increasing inflation. Conversely, a weak PMI might indicate the need for loosening policy (lowering interest rates) to stimulate growth.

• Sector-Specific Responses:

Different sectors can have varying sensitivities to PMI data. For example, manufacturing-focused indices and stocks may have a more pronounced response to PMI data related to manufacturing, while service sector indices may react more strongly to service sector PMI data.

PMI data is a valuable tool for economists, investors, and policymakers to assess economic trends, make informed decisions, and understand the performance of various sectors within an economy.

As traders, our responsibilities are not only to keep abreast of not only when key data such as the PMI is released but to potentially take this into account with reference to potential risks, in our trading decision-making.

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