Analyzing the effects of last week's important indicators on ETFs

Part 8
Analyzing the effects of last week's important indicators on ETFs (Part 8 of 10)

Why the Regional Manufacturing Index prompted mixed responses

Richmond and Kansas City Fed Manufacturing Index

After a strong three months of bullish business conditions, the capital of the Commonwealth of Virginia ended last week on a softer note. According to the Federal Reserve Bank of Richmond, the manufacturing index for the region fell for the first time since July, at -6 versus January’s +12. Weakness swept across the report—including new orders, at -9 versus +14 in January, and backlog orders, lowering to -8 versus -2. Shipments were also negative, as were capacity utilization and the workweek. Inventories rose on the weakness of shipments, while employment was at zero for the second month.

Richmond Federal Manufactiuring IndexEnlarge Graph

On the other hand, the Kansas City manufacturing index month-over-month composite index was at 4 in February, much in line with the January reading of 5, and up from -3 in December. Price indexes were mostly stable or slightly lower than the previous week.

The manufacturing sector is one of the major sectors of the economy. Increases in manufacturing indicators have a big influence on the stock and bond markets. The stock market reacted positively on the increase in the manufacturing indicator, but the bond market tends to assess the impact of growth in future inflation, which could adversely impact the bond market. Investors assess this manufacturing data to understand the regional success or backdrop of the economy.

Index definition

The Federal Reserve Bank of Richmond manufacturing index is a composite index that represents a weighted average of shipments, new orders, and employment indexes. Each index is a diffusion index. That means it’s equal to the percentage of responding firms reporting increases minus the percentage reporting decreases, with results based on responses from 80 out of 110 firms surveyed. The data is released on the fourth Tuesday of each month.

The Kansas City Fed manufacturing index is the composite index that provides an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. While manufacturing activity declined in the Kansas City Fed manufacturing index—particularly at the food and beverage segment—the production of durable goods products increased slightly. Other month-over-month indexes were mixed. The production index jumped from -8 to +3, and the shipments index also climbed higher. The order backlog and employment indexes decreased slightly, while the new orders index was unchanged. The raw materials inventory index increased for the second straight month, while the finished goods inventory index remained flat.

Plus, the future factory indexes eased slightly from historical highs in January, indicating a slowdown in the Kansas manufacturing sector.

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