PMI and ISM
The IHS Markit Economics Purchasing Managers Index is a composite index on a scale of 0-100.
A number above 50 indicates an expansionary economy and a number below 50 indicates a contracting economy.
IHS Markit surveys managers from over 1000 different companies from the manufacturing and service sectors.
The specific breakdown is 60% from manufacturing and 40% from services.
IHS Markit provides a steady flow of data from surveyed managers all across the world which makes it very useful for traders and central bankers alike.
There are many relationships to be found between PMI data and equities, currencies, and central bank policies.
The IHS Markit PMI indicator is closely related to the ISM PMI though there is one key difference.
Where ISM uses evenly weighted sub-category scores to determine the overall score, IHS Markit weights individual sub-categories.
The weighting is as follows: New Orders (30%), Production (25%), Employment (20%), Supplier Deliveries (15%), and Inventories (10%).
In their reports, IHS Markit includes information from the ISM report and digs into it deeper to reach some conclusions.
IHS Markit also claims that their survey “has outperformed the ISM survey in providing more accurate indications of actual manufacturing trends in recent years.”
The most recent report for the US was released earlier this month, and as you might expect it was the worst one we’ve seen since the Great Recession.
The PMI posted 36.1 in April which is down from 48.5 in March.
The headline number was dragged down by output which had the worst performance on record.
This was likely due to the mandatory closures of factories and other businesses.
Manufacturing payrolls also contracted sharply; again to the lowest levels seen since 2009.
The author of the report, Chris Williamson, notes that ”Smaller firms are being hit the hardest, and also reporting the highest job losses, but large firms are also seeing the sharpest downturn on record.”
Globally, the picture is quite bleak as well.
20 of 21 sub-categories are at record lows.
Healthcare Services is the only category that’s seen increased activity.
Business activity globally in Tourism and Recreation is nearly nonexistent posting a 10.6.
IHS Markit also releases a PMI in cooperation with JP Morgan, ISM, and IFPSM and found similar business conditions.
Notable from this report is that excluding China, Australia has the manufacturing sector that’s closest to recovery is leading the way back to expansion.
Indonesia and India have been hardest hit and Olya Borichevska from IHS Markit notes that “Only time will tell how permanent the damage to global supply chains is, although moves in many nations to loosen lockdowns may provide a guide over the coming weeks and months.”
IHS Markit PMI data has similar relationships as the ISM PMI.
You should be looking for moves in currency pairs depending on results from various countries.
IHS Markit data is a bit more interesting because they provide data points for so many different countries and regions.
It’s a bit difficult to trade pairs on this information when all business activity globally has collapsed; there are so few areas of actual strength anywhere that everything is all relative.
However, as an example, the JPMorgan PMI report was released on May 4 which showed Australia to be faring relatively well.
On that Monday, the AUD gained against JPY and EUR.
Though it was flat against USD and NZD.
The Institute of Supply Management (ISM) Index is released monthly and is a composite score based on the results of a survey of 300 purchasing managers across industries.
In addition to a variety of industries, the ISM PMI report also includes more narrow data in sub-categories such as New Orders, Backlog of Orders, Exports/Imports, Production, Supplier Deliveries, Inventories, Employment, and Prices.
They further divide the reports into Manufacturing(PMI) and Non-Manufacturing(NMI).
Subcategories for the NMI include Arts, Entertainment & Recreation; Agriculture, Forestry, Fishing & Hunting; Retail Trade; Wholesale Trade; Construction; Transportation & Warehousing; Mining; Professional, Scientific & Technical Services; Information; Accommodation & Food Services; Management of Companies & Support Services; Educational Services; Real Estate, Rental & Leasing; Utilities; and Health Care & Social Assistance.
The overall PMI and NMI numbers are based on the evenly weighted scores of selected subcategories.
The baseline rating is 50.
If the number is above 50, it indicates confidence and an expanding economy.
If the number is below 50, it indicates a lack of confidence and a contracting economy.
The report is released on the first business day of each month.
The most recent report covered April 2020 and reported the first economic contraction after 131 consecutive months of expansion.
The headline Manufacturing PMI registered a 41.5 which is the lowest level since April of 2009.
“Comments from the panel were strongly negative (three negative comments for every one positive comment) regarding the near-term outlook, with sentiment clearly impacted by the coronavirus (COVID-19) pandemic and continuing energy market recession.”
The only two industries that reported increased activity were Paper Products and Food/Beverage/Tobacco.
The report takes care to note that previous relationships between the ISM PMI and GDP may no longer apply.
Traditionally, this report might imply a contraction of .4% in real GDP.
However given the scale of the shutdown and its impact, one should be very careful assuming.
The NMI also decreased and registered 41.8%, the lowest level we’ve seen since March 2009.
Notably, the NMI Business Activity Index fell to the lowest level since the NMI debuted in 1997.
Also notable is that Supplier Deliveries, which is the only index with an inverse score (over 50 means contractionary), reached an all-time high.
The NMI reports that the only two sub-categories that saw an increase in activity were Public Administration and Finance & Insurance which confirms much of the media narrative that we’ve been hearing - people relying on the state for assistance through this period as well as banks and lending institutions overwhelmed with loan applications.
Given that the ISM PMI has a traditional correlation with GDP, traders can use this data point as an indicator of the overall health of the economy.
This makes it important for trading currencies.
If the PMI number is trending up, expect to see a USD rally.
Again, given the severity of the economic shutdown we’ll likely see many of these traditional relationships break down; so tread lightly.
But in the case of the ISM PMI, it held up well as we saw both the Yen and Euro strengthen against the US Dollar on May 1, 2020.
USD also weakened, though to a lesser extent, against the Swiss Franc and Canadian Dollar.