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Thread: Purchasing Managers Index (PMI)

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    Default Purchasing Managers Index (PMI)

    Why PMI statistics are important and how reliable are they exactly?

    - The market is paying close attention to the Purchasing Managers' Index (PMI). It is an indicator that has the ability to determine the direction of the market. This puts it in the same set of macroeconomic data by national and international statistical offices. Why are these statistics important and how reliable are they exactly?

    - The numbers itself are derived from the result of a statistical survey. It is based on hundreds, if not thousands, of surveys sent to purchasing managers of different companies. This process is reminiscent of classic social research methodology, unlike opinion polls during elections, for example. As it is an experimental study, the researchers in charge of it aim to provide a representation of these results. To do this, data is disaggregated by country, sector, and company size. Then they randomly choose companies to send out surveys. Survey questions typically fall into 8-10 main categories. It centers around changes in new orders, production outputs, number of vacancies, future employment prospects as well as the sources of their operating resources. Managers can determine degrees of change at the level of each category. The result is a simple number that one can easily weigh. It is used widely by researchers and institutes, and each entity has its own formula, to calculate the final PMI figure. The calculation process shows how dynamic the PMI is. It combines an assessment of the current situation as well as a possible future forecast. The rigorous research methodology and large sample size make the process as objective as any formal public opinion poll. That's why the market generally considers it reliable data.

    How does PMI affect the market?

    - This leads us to why investors consider PMI a very important indicator? Take a mutual fund, for example, with a stock portfolio containing several hundred individual items, diverse in both sector and region. The goal of the portfolio manager is to beat the benchmark and achieve higher returns than the major equity indices.

    - When the German manufacturing PMI dips below 50 points, it indicates that German corporate growth may be slowing. In this case, the portfolio manager may want to minimize his damage by selling. Not only will they sell, but they will do more than that and as quickly as possible to protect their past profits and avoid any potential losses. Instead of waiting for their stocks to drop, it is better for them to get rid of the risky assets sooner. The result is often strong selling pressure on the stocks and related indices. Also, speculators are well aware of the kind of events a drop in PMI might trigger. Therefore, they tend to take long positions in an attempt to ride the wave. That's the theoretical part of it, but how does it actually work? Like any other indicator, PMI is not infallible either and it is only one of many factors that influence these decisions.
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    What is PMI


    PMIs are Purchasing Managers' Indices. They are formed as a result of surveys.

    A reasonable question arises: why is the opinion of a certain group of people so important for investors? The answer lies in what procurement agents do. Basically, these are the people who are responsible for supplying materials for the needs of their companies. If the market is experiencing a peak in demand for manufactured goods, then managers are increasing purchases of components. As soon as the sales of finished goods decrease, the orders of components fall. That is why purchasing managers are so active in monitoring the dynamics of production and have a large amount of information in this area.

    PMI types

    There are several types of PMI. The first to appear were indexes from ISM, the Institute for Supply Management. There are two types of ISM indices - industry and service. The Industrial Report from ISM was developed in 1931 - during the Great Depression, when it was important to receive comprehensive and timely economic information, it was founded by US President Herbert Hoover.

    Currently, more than 400 member companies throughout the country receive the questionnaires. They represent approximately 20 different industries. The Manufacturing ISM is published on the first business day of every month and is considered more important due to its timeliness, although the services segment accounts for about 80% of US GDP.

    Indices from IHS Market came later. The methodology for their calculation and interpretation is similar to the indicators from ISM. Market indices are calculated in more than 40 countries, which account for about 85% of world GDP. Indicators are published twice a month. In the middle of the reporting period, a preliminary version is released, at the end of the month (at the beginning of the next) the final version is published. Allocate PMI in the manufacturing sector, segment of services and composite indices. In the US, the ISM indicators are more significant, apparently due to a longer history. Market calculates indices for the euro area both for individual countries and for the region as a whole.

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    In China, Market PMIs are especially important, as the PRC leadership is periodically accused of manipulating macro statistics. There are also official versions of the indexes. They are more focused on the activities of large corporations, many of which are state-owned.

    Calculation methodology and interpretation

    In general, the methodology is similar across the entire PMI spectrum, the indices are diffuse in nature and are measured in%. Purchasing managers are asked to assess whether the activity of their enterprises has increased, decreased or remained at the same level in the following areas: new orders (the most important component), production, employment, inventories, purchase prices, etc.

    The general formula within each sub-index is:


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    From these components with different weights, an index is formed - in the industry or in the service sector. According to the Market methodology, the consolidated PMI of a particular country is also calculated based on two key indices. At the same time, industrial indicators are the most significant for financial markets.

    Sample Industry Report from ISM, data for March 2019.

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    Index values ​​are generally interpreted as follows:

    Above 50 - manufacturing and economy are booming.

    Below 50 but above 45 - production is shrinking, but the economy as a whole continues to grow.

    Above 60 within 3-6 months against the backdrop of a rapidly developing economy and low unemployment may push the central bank (the Fed in the US, for the ECB the eurozone composite indices are important) to raise interest rates.

    Below 45 for a long period of time - most likely, production and economy are in a state of decline. The likelihood that the central bank will resort to lower interest rates or other measures to stimulate economic growth increases.

    Below 42 for an extended period of time may be a sign of an impending recession.

    The reports from ISM are taken into account by the Fed for a preliminary assessment of the economic situation. A report from Markit allows you to forecast the dynamics of US GDP.

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    Impact on the market


    Investors primarily pay attention to how much the indicator has changed compared to the consensus forecast of analysts, although long-term trends are also important.
    • Promotions. The timeliness of publication and the sensitivity of data to economic turning points makes the information particularly valuable. The stock market, as a rule, reacts positively to the growth of indices, especially after a period of moderate economic growth. Of course, if the economy is already overheated, a sharp jump in the indicator may frighten investors, because further monetary policy tightening may follow. A drop of indices below 50 may be a harbinger of sell-off in the stock market, although central banks with monetary stimulus may intervene in the process.
    • Bonds. The higher the PMI values ​​relative to expectations, the more negative it is for bonds. Conversely, a low index value is a reason for the growth of fixed income securities, as it means suppressed inflation expectations and the economy.
    • Currency market. The dollar has a positive correlation with the ISM indices, because the higher business activity, the more attractive many US assets are. All other things being equal, currencies and PMIs of other countries and regions are similarly correlated.

    Strengths of PMI:

    Coverage - these are national indicators.

    Timeliness of data release is a leading indicator.

    Ease of interpretation.

    Breakdown by component.

    Weaknesses of PMI:

    Formed from the private opinions of individuals; the data are not clear quantitative, but rather an estimate.

    Though trading on financial markets involves high risk, it can still generate extra income in case you apply the right approach. By choosing a reliable broker such as InstaForex you get access to the international financial markets and open your way towards financial independence. You can sign up here.

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    PMI search institutes:
    Statistics collected by most other government and administrative agencies are generally based on past data, with a possible delay of one to two months. The main advantage of PMI is its ability to give some insight into the future. It is an invaluable feature in the eyes of both traders and investors. The largest PMI research institute is based in the United States and is the International Supply Management Institute, IHS Market. They both study a variety of developed markets and use somewhat similar research methods, which makes comparison between them simple. They usually use three sub-indices: the most common ones are the Composite PMI, the Manufacturing PMI and the Service PMI. The significance of these three varies from country to country, however, for equity traders, this type of segmentation greatly helps them evaluate the components of their portfolios.

    Chinese PMI:
    China Caixin PMI was released on April 1 at 50.8. And by an additional 0.9 point from the previous month and exceeding expectations by 0.6 point. Following the announcement, the Shanghai Composite rose from 3090 to 3,154 points, as positive expectations generated new long positions. Meanwhile, Market manufacturing PMI was released in Germany on the same day. It was at 44.1 points, which means 4.8 points less than last month and 0.6 points less than expectations. So it is natural to assume that the German DAX will drop sharply as a result, but that is not what happened. It doesn't matter how terrible the PMI results are if the investors actually dumped their shares. The German index has been below the benchmark over the past year. This means that investors are set back up prices by the constant flow of bad news. As a result, a poor report alone did not exacerbate the entrenched negative outlook of the German economy. On the one hand, the optimism in a positive China PMI was contagious enough to give investors hope that the German economy can recover as well. By the end of the day, both the DAX and Asian indices closed significantly higher as one point of data does not necessarily point to a larger trend. Looking at the big picture will help you protect yourself from losing vision and falling into the trap of false perception.
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    It is an index of prevailing direction of the economic trend in manufacturer and service sectors. It consists of a diffusion index that summarise whether market condition as viewed by purchasing manager or expanding stay in the same are contracting the purpose of the the purchasing manager index is to provide the information about the current and future business condition to company decision makers and analyst and investor.
    The purchasing manager index is measure of prevailing direction of economic trend in manufacturing industries.
    Purchasing management index is complied and released monthly by the institute for supply management. It is based on the monthly service and to the senior executive at more than 4000 company and 19 Primary Industries which are weighted by their contribution to US GDP. It is based on five major service areas new Orders and inventory levels production and supply deliveries and employment. Sarve include the question about the business condition and any change whether it be improving no changes are deteriorating. The headline between the purchasing manager index is the number from 0 to 100. Purchasing managers index above 50 represent an expansion when compared with previous month and it is the reading under 50 represent a contraction and reading at the 50 indicate no change the further away from the 50 greatest level of change.
    Purchasing management index is calculated only by the p 1 is equal to 1 p 2 is equal to zero point 5 MP3 is equal to zero.
    P1 is the percentage of answer reporting and improvement and B2 percentage of answer reporting on no change and P3 percentage of answer report in on deterioration other company also produce the PMI number including market group and which put on the PMI for various countries outside the US.

    Though trading on financial markets involves high risk, it can still generate extra income in case you apply the right approach. By choosing a reliable broker such as InstaForex you get access to the international financial markets and open your way towards financial independence. You can sign up here.


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