Now that most major economies have released their manufacturing PMI readings, let’s take a look at whether trends are improving or not and what this could mean for forex price action.
PMI? What’s that?
The Purchasing Managers’ Index or PMI is a survey conducted among the purchasing managers of carefully selected companies, asking them about the current economic and business conditions across various sectors. And on that note, we are focusing only on the manufacturing sector, as if the blog title didn’t give that away already.
Moving on, a PMI reading above 50.0 indicates industry expansion and optimism, while a PMI reading below 50.0 indicates industry contraction and pessimism. These readings are important because they act as leading indicators for the overall economic condition within the private sector. Also, most central banks often check the PMI readings in determining their monetary policy, which is why most forex traders are also very keen on keeping up to date with these reports.
There are many providers of business surveys, and with just as many methodologies for collecting and analyzing data. Because of that, comparing the PMI data of various economies becomes a difficult process so we’ll mostly focus on one of the most extensive and well-known providers, which is Markit.
Markit’s PMI reports have a standardized methodology and are used by the Bank of England, the European Central Bank, and the Japanese Ministry of Finance, among others. Markit actually collects the PMI data of most of the major economies, except for Switzerland, Australia, and New Zealand. For the aforementioned reasons, we are going to use Markit’s PMI data as our primary resource. Apples and oranges, I say.
Global PMI Update
Okay, here’s how the manufacturing PMI readings have turned out for most major economies for the past 9 months:
As you can see, the PMI readings of most of the major economies are above the 50.0 level, with the exception of Canada and China.
Canada is very noticeable because of the amazing rate at which its PMI reading declined, although it did finally see a turnaround in March and a slight but noticeable improvement in May. Markit’s Canadian report states that the recent improvement was due to “a modest rebound in production volumes” due to higher demand for Canadian exports brought about by “exchange rate depreciation.”
China is also noticeable for it’s dive below the 50.0 level. But what’s even more noticeable is how the official PMI data released by China’s National Bureau of Statistics (NBS) differs from Markit’s data in term of data trends. To be rather blunt about it, the NBS PMI reading presents a pretty picture to investors since it’s still above the 50.0 level.
Both NBS and Markit saw a slight improvement in manufacturing industry activity for May, although Markit’s reading was still below the 50.0 mark. The details of the report are mostly in-sync too since both reports state that overseas demand has fallen while domestic demand has remained stable. The only thing the reports really disagree on is the future; Markit forecasts further contraction and calls for more stimulus while the NBS strongly hints at further expansion down the road.
Moving on, the euro zone seems to be doing pretty well, which lines up rather nicely with the other optimistic data points, and puts some meat on the ECB’s statement that their QE program is “proceeding well.”
Japan is doing well too, so the optimism that BOJ officials such as Governor Kuroda and Board Member Kiuchi have for the economy does seem to have a foundation. Even more so because Japan’s economy is primarily export-driven and manufacturing-dependent, although I did point out in an earlier article that Japan’s economy seems to be shifting into one driven by domestic demand.
Next up is the the U.K., which has been on the up and up. Markit’s U.K. PMI report states that PMI has remained above the 50.0 mark for 26 straight months now. The report also cites solid domestic demand for consumer goods as the primary reason for the stable performance.
As for the U.S., both manufacturing PMI readings from Markit and the Institute for Supply Management (ISM) show that the U.S. has seen better days, but they’re still both above the 50.0 mark, so it’s all good.
The Markit report cites domestic demand as the primary reason for the continued expansion and declining exports and a strong Greenback as the primary drags. The ISM report, meanwhile, added that poor personal spending was another problem, although that has been probably been offset by a solid rise in May’s retail sales data.
Overall, global PMI trends ain’t so bad, especially the euro zone and Japan given their respective circumstances. As for China, it’s either in the dumps (according to Markit) or doing okay (according to the NBS), so take your pick. But if Markit’s data is more accurate, then it does not bode well for Australia and New Zealand since both economies are dependent on Chinese demand. Canada is in the dumps too but seems to be recovering. The U.S., meanwhile, is still going strong, but is it enough to support a September rate hike?
And on that note, remember that while PMI readings have intrinsic value, they are still leading indicators first and foremost since they are essentially just surveys.