MARKET ANALYSIS
MANUFACTURING
According to some economists, manufacturing is a wealth-producing sector of an economy, whereas a service sector tends to be wealth consuming. Changes in an economy’s manufacturing production or industrial production levels can therefore be seen as good indicators as to the health of the economy and its potential for longer term growth.
Due to the impact manufacturing and industrial production can have on import and export levels they can also have a significant effect on the currency markets so can be important indicators for spread betters to watch.
The Purchasing Managers Index is also a leading indicator of economic health. PMI surveys are conducted in both the manufacturing and services sectors and ask purchasing managers to report the relative level of business conditions including new orders, production, employment, prices and inventories. These surveys are considered important as businesses tend to react quickly to market conditions and PMI surveys ask for factual information rather than opinions.
Many PMI figures are released as flash estimates a week\ or two before the final figure is released. Often the earlier flash figure is considered to have the most impact.
Other indicators to consider in this area are the Japanese Tankan Index and US Durable Goods Orders.
INDUSTRIAL PRODUCTION
Country
Type
Manufacturing
Announced
Monthly
Description
A measure of the change in volume of the physical output of a country’s energy sector, factories and mines. This figure is significant as a short term indicator of the strength of national industrial activity.
It accounts for roughly ¼ of overall GDP and an understanding of manufacturing trends can be useful in forecasting output and GDP changes.
High or rising industrial production figures imply growth and expansion, which can lead to a more positive sentiment on local currency, however, exorbitant production and consumption can spark superfluous inflation. Interest rate policy can be used as a mechanism to keep inflation in check.
MANUFACTURING PRODUCTION
Country
Type
Manufacturing
Announced
Monthly, around 40 days after the month end
Description
Manufacturing makes up around 80% of total Industrial Production and therefore is a leading indicator of economic health. The figures detail the change in the total inflation-adjusted value of output of the nation’s factories, mines and utilities.
The manufacturing sector is a major source of cyclical variability in the economy, so serves as a pulse for general direction. As a result, a report can have a significant influence on markets so can be an important indicator when considering placing financial spread bets, although reports can often be adjusted by season or weather conditions.
Manufacturing growth, because of its make-up within the Industrial Production figure, can have a significant effect on economic growth and can influence sentiment towards local currency.
DURABLE GOODS
Country
Type
Manufacturing
Announced
8 times per year
Description
The advance durable goods report also contains information on shipments, unfilled orders and inventories. Shipments represent deliveries made, valued at net selling price after discounts and allowances, excluding freight charges and excise taxes.
Semiconductor data are available for shipments and inventories. Unfilled orders are those received but not yet delivered. Historical data began in 1992. Orders for durable goods show how busy factories will be in the months to come, as manufacturers work to fill those orders.
The data not only provides insight into demand for items such as refrigerators and cars, but also business investment such as industrial machinery, electrical machinery and computers. Durable goods orders are one of the most volatile economic indicators reported in the month and this series can be revised by significant amounts from one month to the next.
More than any other indicator, it is imperative to follow either three-month moving averages of the monthly levels or year-over-year percent changes. These adjustments smooth out the monthly variability and provide a clearer picture of the trend in the manufacturing sector.
PURCHASING MANAGERS INDEX
Country
Type
Manufacturing
Announced
Monthly
Description
This composite diffusion index of business conditions surveys purchasing managers in both manufacturing and services firms. The PMI differs from economy to economy with manufacturing the main focus in the US with the Institute for Supply Management figure the key piece of data.
Many financial spread betters with an interest in the markets don't realise that non-manufacturing activity is covered in this index and tend to focus on the manufacturing side only.
Investors should be aware that Kingsbury International LTD releases the monthly report to those with private subscriptions three minutes prior to release to the media, which may account for occasional market activity just prior to public release.
However, in Europe there is a separate manufacturing and services figure. These are derived from a survey asking about 600 purchasing managers to rate the relative level of business conditions. These conditions are widespread and include employment, production and inventories but to name a few.
In the UK, Construction PMI is viewed as key figure and is released the same day as the US ISM figure which can lead to some volatile currency swings throughout the day. This has a smaller sample size than the European figure, about 170 purchasing managers, but asks a similar range of questions relating to business conditions.
The breakeven point for the index is 50. Readings above that indicate positive growth and readings below 50 indicate contraction. The farther the reading is from 50, the more rapid the pace of growth or decline.
TANKAN INDEX
Country
Type
Manufacturing
Announced
Quarterly, near current quarter end
Description
This survey of the largest manufacturers in Japan is conducted by the central bank with a view to shaping monetary policy. The Tankan is a bellwether for the health of the Japanese economy.
The main component is the Large Manufacturers Index, since Japan’s economy is heavily export-driven. The survey uses zero as the midpoint, so the higher a positive reading, the stronger the sentiment.
Likewise, the more negative a reading, the weaker the sentiment. There is also an outlook for large manufacturers in the coming quarter. Another key component of the Tankan measures capital expenditure of all Japanese industries excluding financial services.
