During the upcoming European and US session today, many economic figures will be released and are expected to have a notable impact on the markets. In today’s article, we will focus on the Manufacturing PMI data; what it is, how it’s read, what matters the most and how its possible impact on the markets can be understood.

Definition

Manufacturing PMI represents the level of a diffusion index based on surveyed purchasing managers in the manufacturing industry. A survey is distributed to about 600 purchasing managers, asking respondents to rate the relative level of business conditions including employment, production, new orders, prices, supplier deliveries, and inventories. A result above 50.0 indicates industry expansion and below 50.0 indicates contraction.

Why Traders Care

It is a leading indicator of economic health – businesses react quickly to market conditions, and their purchasing managers hold perhaps the most current and relevant insight into the company’s view of the economy.

Components

As noted above, the manufacturing PMI is a diffusion index, it has many components:

What Matters The Most?

Most free websites provide only the main index which is the Manufacturing PMI. This index is only the average of all the components. Therefore, even when the main headline comes in with good news, the currency might drop and vice versa. Why? Because investors and investment firms look at the components in details, meaning, if the Manufacturing PMI comes in with a surprise jump, they will look at WHY the index has jumped. Is it because of higher new orders or higher inventories? Is it an increase in employment components or prices? Such details  matter more than just the main headline.

If the jump comes on the back of higher inventories, while employment and new orders for example decline, this would be seen as a negative change, because higher inventories means lower sales.