Microeconomic Indicator in FOREX:
Composite Purchasing Managers’ Index
What is the Composite Purchasing Managers’ Index?
The Purchasing Managers’ Index is a leading economic indicator which analyses purchasing managers at businesses for any given sector. PMI is measured by surveying top-level management from 400 companies within 19 primary industries, about the changes of key business variables they observed, compared to the previous month. It is based on five important survey areas which are Inventory levels, Supplier deliveries, Employment, New orders & Production. The surveys are conducted separately for the manufacturing sectors and the services sectors. The survey data of both these sectors are then compiled and released as a single index which is known as Composite Purchasing Manager’s Index.
PMI is one of the most important indicators of the country’s business activity as these values of a respective country are usually released at the beginning of the month which is much earlier than most of the data on manufacturing, GDP and industrial output. These values are compiled and released by two of the most common surveyors Markit Group & Institute of Supply Management. The index value ranges from 0 to 100, an index above 50 is considered as the market got expanded in the country and anything below 50 is considered as the market got contracted.
What does PMI measure?
PMI measures the health of an economy. A PMI moving in positive direction enhances the attractiveness of a country’s economy, compared to the country whose PMI is decreased with respect to the previous month. PMI also helps in forecasting the GDP of a country and thereby the price movements of that country’s currency. Businesses react swiftly to market conditions and their purchasing managers hold the most current, accurate and relevant insight into the company’s view of the economy.
Reliable sources of information on ‘Purchasing Managers’ Index’ for Major currencies:
There is a lot of information with respect to the PMI of different countries in the sources provided below. You can familiarize yourself with the PMI of the respective country along with the historical data related to that. You can also compare the Purchasing Managers’ Indices of one country to the other using this web portal. The graphical representation of the historical data will give you a clear understanding of how this data changed over time. You also get to change the graphical representations according to your preference. A ton of more information related to the latest news in that regard is provided to give you a better understanding.
GBP (Sterling) – https://tradingeconomics.com/united-kingdom/composite-pmi
What do traders care about the Purchasing Managers’ Index and its impact on the currency?
Purchasing Managers’ Index measures the fundamental direction of the economic trends in the country’s manufacturing sector. Hence it is considered as the leading indicator of the economic health of a country. Its value and any change in its movements will provide strong insight into the business investors, market analysts, and traders who are holding that country’s currency. PMI also acts as a leading indicator of the growth or decline in GDP of a country.
If there is a negative direction of the PMI values in a given country, foreign investors might consider reducing their presence & exposure in the equity markets of the country and This will eventually weaken the currency. Contrarily, if there is a positive direction of the PMI values, investors may consider increasing their exposure there. This will eventually strengthen the currency. So traders and investors might want to watch the PMI values keenly in order to take the right business decisions.
How do Central Banks use PMI statistics?
Central banks of most of the countries use the Purchasing Managers’ Index and the direction it is moving month-on-month, to take crucial decisions on interest rates. PMI values are also used by the central banks & federal governments to formulate their monetary policy accordingly.
Frequency of the release
PMI is generally compiled and released on a monthly basis by the Institute for Supply Management (ISM) & the Markit Group. However, there are a few exceptions. The survey results of Japan and Euro area countries are measured on a monthly basis but are compiled and released after 3 weeks into the current month. The PMI results for the US are released on a monthly basis too and are published on the first business day after the month ends. For the rest of the major economies like Canada, Australia, New Zealand, etc., the results are published on either the last day of the current month or the first business day after the month end.
The Bottom Line
PMI acts as a critical decision-making tool for managers in various roles. Manufacturing manager, for instance, makes production-related decisions based on the new orders which are expected from the customers in future months. These new orders drive management’s purchase decisions about various raw materials and components required. Same applies to the country as well. Some country’s use PMI data to plan its annual budget, employment rate and to forecast cash flow. Forex traders must correctly interpret the index numbers and give at most importance to PMI data, as it is a leading indicator and doesn’t depend on the historic data.