During the upcoming European and US session today, many economic figures will be released and are expected to have a notable impact on the markets. In today’s article, we will focus on the Manufacturing PMI data; what it is, how it’s read, what matters the most and how its possible impact on the markets can be understood.
Manufacturing PMI represents the level of a diffusion index based on surveyed purchasing managers in the manufacturing industry. A survey is distributed to about 600 purchasing managers, asking respondents to rate the relative level of business conditions including employment, production, new orders, prices, supplier deliveries, and inventories. A result above 50.0 indicates industry expansion and below 50.0 indicates contraction.
Why Traders Care
It is a leading indicator of economic health – businesses react quickly to market conditions, and their purchasing managers hold perhaps the most current and relevant insight into the company’s view of the economy.
As noted above, the manufacturing PMI is a diffusion index, it has many components:
- New Orders
- Supplier Deliveries
- Prices Index
What Matters The Most?
Most free websites provide only the main index which is the Manufacturing PMI. This index is only the average of all the components. Therefore, even when the main headline comes in with good news, the currency might drop and vice versa. Why? Because investors and investment firms look at the components in details, meaning, if the Manufacturing PMI comes in with a surprise jump, they will look at WHY the index has jumped. Is it because of higher new orders or higher inventories? Is it an increase in employment components or prices? Such details matter more than just the main headline.
If the jump comes on the back of higher inventories, while employment and new orders for example decline, this would be seen as a negative change, because higher inventories means lower sales.
On the other hand, if the index comes in weaker due to lower inventories, while orders and other components increase, this would be a positive change. It is somewhat complicated but as a trader, you need to care to study these aspects so as to not remain confused about why the market moves in a direction that is contrary to that of the released data (positive or negative).
During the European session, we will be watching the Manufacturing PMI from Switzerland and the UK, both of which are likely to have a notable impact on the markets. Because of the Brexit effect, the UK’s Manufacturing PMI is particularly important this time. The estimates are slightly weaker than they were in previous months. Yet, the index advanced for the past two consecutive months; therefore, if today’s data comes with soft outcomes, you need to look at the components to decide on whether you are going to buy or short the British Pound.
In the US session, PMI results will also be of significant importance because we are approaching both the US presidential elections and the Federal Reserve’s decision. The estimates are slightly higher, perhaps the highest in two months. Yet, this sector suffered from a notable slowdown since the end of the 3rd QE. Therefore, another weak number might be the catalyst for another leg lower in USD across the board.