Interpreting the PMI Data
InvestingOnline.com
3/08/2018, 09:48One of the economic data mostly overlooked by Forex traders, but with high implications in the day-to-day market’s volatility, the PMI offers an educated guess about what the central banks will do in the future.
The acronym stands for Purchasing Managers Index and, in earnest, this is a survey. A survey of businesses in different economic sectors and managers must respond to questions like:
- What is the employment level?
- Will the company hire or lay off people in the next six months?
- How has the inventory levels changed in the past six months and predictions for the next six months?
And so on. These are just examples of questions from the full survey, and, in the end, the data is compiled for every economic sector.
Hundreds and hundreds of businesses participate in the survey, always changing from month to month so that the data doesn’t become biased.
After compilation, a number results and it is interpreted based on the fifty level. Values above fifty show an economic sector that expands, grow nicely, and ads value to the overall economic activity. The economic outlook is bright, and the expectations grow that the central bank will notice the pick-up in economic activity and will start talking hawkish. That’s bullish for the currency.
On the other hand, values below the fifty mark spell troubles for the currency. They show that respective economic sector contracts, the recession might hit the economy and expectations grow that the central bank will ease the monetary conditions. Usually, the FX market is the first to react to such poor PMI data by selling the currency way ahead of the next central bank meeting.
PMI’s Around the World
In the Eurozone, the PMI’s refer only to two sectors: services and manufacturing. The two make a big chunk of the overall GDP growth and are representative of the present economic activity.
The United Kingdom calculates, on top of the services and manufacturing PMI’s, also one dedicated to the construction sector. Housing plays a critical role in economic growth and may affect the overall economic activity, as we all learned after the 2008 financial crisis in the United States started from a housing bubble.
The United States, as the largest economy and home of the world’s reserve currency, looks at the PMI data in even more details. The name differs, though.
In the United States, the release is called ISM, coming from the Institute of Supply Management, the institution in charge of calculating and releasing them. They reflect the strength of the services and manufacturing sectors in the United States, closely watched by traders around the world.
In Canada, for instance, there’s only one PMI release called Ivey PMI. It refers to the overall economic activity and compares the results with the fifty value too.
Conclusion
As a game of expectations, trading relies most on interpreting the next central banks’ moves. Because of that, any hint given by an economic release may change a traders positioning. Hence, monitoring data like PMI’s around the world and for various economies helps to understand better the next central banks’ policy changes and how they’ll affect the currency.
