PMI and fixed income
As we’ve seen in this series, there are three major Purchasing Managers Index (or PMI) reports issued in the U.S.: the Institute for Supply Management’s (or ISM) Report on Business, ISM-Chicago’s Chicago Business Barometer/PMI, and the Markit Intelligence PMI report.
While the ISM and the Markit PMI reports are issued separately for the manufacturing (XLI) and the non-manufacturing or service sectors, ISM-Chicago issues a composite PMI reading including both sectors. Since the Chicago PMI isn’t directly comparable to the two other PMI readings, we’ll limit our list of key differences to the ISM and the Markit PMI reports.
- While the sub-indices (New Orders, Production, Employment, Supplier Deliveries, and Inventories) in the ISM PMI composite reading are equally weighted, the Markit PMI reading assigns unequal weightings to the five component sub-indices (New Orders—0.3, Output—0.25, Employment—0.2, Suppliers’ Delivery Times—0.15, and Stocks of Items Purchased—0.1, with delivery times inverted).
- The size of the survey panel is usually about 400 companies in the ISM PMI, whereas it’s about 600 companies in the case of the Markit PMI.
- Markit Intelligence also issues a “flash” reading for the PMI, usually about a week earlier, which is typically based on approximately 85% to 90% of total PMI survey responses each month and is designed to provide an accurate advance indication of the final PMI data. The ISM doesn’t issue a comparable “flash” reading.
- PMI releases are important economic indicators that can move stock (SPY) and bond (TLT) markets, like they did on April 1 (refer to the previous article in this series).
- Manufacturing (VIS), as a coincident indicator, would imply economic growth in the overall economy, other factors remaining constant.
- Rising interest rates usually accompany an economic expansion. However, the Fed has indicated that it would take a host of economic indicators into consideration before raising the base rate.
- However, while short-term rates may stay low until the Fed increases the Fed funds rate, rates on the long end of the yield curve (TLH) are undergoing pressure. The Treasury yield curve steepened on April 1 after the two PMI releases.
- One way investors can profit from rising rates is to invest in inverse bond funds like the ProShares Short 20+ Year Treasury Fund (TBF) and the Barclays iPath US Treasury 10-Year Bear ETN (DTYS). Inverse bond ETFs provide the inverse return of the underlying benchmark index.
- Inflation trends in PMI readings are some of the most important indicators for fixed income investors (TLT).
To learn more about inflation expectations, check out the Market Realist series Will firms’ March inflation forecasts impact the Fed’s mandate?