Why does market correlation matter? Correlation is a statistical measure that determines how assets move in relation to each other…
What is PMI and why is it important?
2023-03-28 • Updated
Purchasing Managers’ Index (PMI) is an indicator that measures the economic health of the manufacturing sector. The aim of the Index is to provide information about current business conditions to company analysts, purchasing managers, decision makers.
It is based on five main indicators such as inventory levels, production, supplier deliveries, new orders and the employment environment.
How is the information gathered?
There are two main producers of PMI. They are the Institute for Supply Management that produces metrics for the US and the Markit Group that does it for over 30 countries worldwide. So they hold surveys monthly sending them to purchasing executives at nearly 300 companies. The purchasing managers answer questions about different elements of the survey, measuring each of them like “improvement”, “no change”, “deterioration”.
There is a special formula that assigns weights to each element and then multiplies them by 1.0 for improvement, 0.5 for no change, and 0 for deterioration. At the end, the number above 50.0 indicates industry expansion, below this figure – contraction.
Pros and Cons of the PMI
- It is delivered monthly and during the current month (or just several days after it).
- It gives a good prediction of future data, such as GDP and official authorities’ manufacturing reports.
- Report shows point changes from the previous data.
- The same metrics are applied to all countries, it helps to compare countries’ data.
- It is subjective in its data.
- In the US regional reports are delivered earlier and can have high correlations and take some of the steam out of this release.
Why is it so important?
Someone can think that this Index is not so important because it is just a survey based on opinions of managers. However, it is one of the most crucial indicators for investors looking for clues about economic growth. They use this measure as a leading indicator of GDP growth or decline. What is more important is that central banks use these data when formulating monetary policy.
Not only the whole PMI data, but its individual components can be used in different markets. For example, the bond market watches the growth in supplier deliveries and prices paid, because figures can give information about inflation.
The Index is important not only for manufacturing but for the whole economy, as manufacturing is the important part of it.
So if the PMI goes lower in a given country, investors may consider reducing their exposure to the country’s equity markets and increasing it into other countries’ equities with rising PMI reading.
PMI economic calendar
Euro area releases flash PMI data for manufacturing and services around 3 weeks into the current month. These indicators are released by France, Germany and the currency union itself and usually make a great impact on the euro. Later on the first day of the next month, Markit publishes final readings of European PMIs. However, this time the euro exchange rate is not so easily influenced.
In America, ISM manufacturing PMI is released on the first business day after the month ends. For services, ISM non-manufacturing PMI comes out on the third business day after the month ends.
UK PMI readings are announced in the first days of each month for the previous month. They always come in the same order: manufacturing, construction, services. Services industry plays a more important role in the UK economy than in economies of the EU and the US, that is why services PMI is considered as more crucial in the UK.
As for China, there are two kinds of PMI: Caixin manufacturing PMI and official manufacturing PMI. Caixin manufacturing PMI is released on the first business day after the month ends. Manufacturing PMI data appears on the last day of the current month. Official manufacturing PMI tends to have more impact when it is released ahead of the Caixin Manufacturing PMI because the reports are tightly correlated. These data affect not only traders who trade on CNY, but NZD and AUD as well.
Although the PMI is the indicator that is measured on a survey base, it is one of the main indexes that displays economic growth and helps trader and investors to forecast. The main advantage of the Index is that it is released faster than other official data. Also, businesses react quickly to market conditions, and their purchasing managers hold the most current and relevant information about the economy.
How to open an FBS account?
Click the ‘Open account’ button on our website and proceed to the Personal Area. Before you can start trading, pass a profile verification. Confirm your email and phone number, get your ID verified. This procedure guarantees the safety of your funds and identity. Once you are done with all the checks, go to the preferred trading platform, and start trading.
How to start trading?
If you are 18+ years old, you can join FBS and begin your FX journey. To trade, you need a brokerage account and sufficient knowledge on how assets behave in the financial markets. Start with studying the basics with our free educational materials and creating an FBS account. You may want to test the environment with virtual money with a Demo account. Once you are ready, enter the real market and trade to succeed.
How to withdraw the money you earned with FBS?
The procedure is very straightforward. Go to the Withdrawal page on the website or the Finances section of the FBS Personal Area and access Withdrawal. You can get the earned money via the same payment system that you used for depositing. In case you funded the account via various methods, withdraw your profit via the same methods in the ratio according to the deposited sums.