Flash PMI at one-year low
In April, the flash Purchasing Managers’ Index (or PMI) provided by HSBC fell to 49.2. Numbers above 50 indicate expansion, anything below 50 suggests contraction, and a reading of 50 shows no change. April’s PMI failed to meet market expectations of 49.6. A PMI index of 49.6 for the month of March came after a slight rebound to 50.7 in February.
New orders for April declined to a one-year low of 49.2 compared to 49.8 in March. Input and output prices also showed signs of decelerating again after having moderated in March. These numbers suggest building deflationary pressures. This is a negative indicator for the economy.
Why you should track the HSBC PMI
HSBC’s PMI for China is a key indicator. The index shows the direction that the country’s manufacturing sector is taking. Five major components make up the index:
- new orders, 30%
- inventory levels, 10%
- production, 25%
- supplier delivery times, 15%
- employment environment, 20%
This index is one of the most closely watched business surveys. It helps financial institutions, companies, and investors make more informed decisions.
Manufacturing and iron ore companies
Iron ore demand closely relates to the manufacturing sector’s performance in China. A slowing pace of manufacturing and deflationary pressures do not bode well for already depressed iron ore prices. This is negative for companies like Rio Tinto (RIO), BHP Billiton (BHP), Vale (VALE), and Cliffs Natural Resources (CLF).
Investing in the iShares MSCI Global Metals & Mining Producers ETF (PICK) is an efficient way to gain exposure to the iron ore sector without having to choose individual companies. BHP Billiton, Rio Tinto, and Vale form 17.9%, 10.8%, and 2.6% of PICK’s holdings, respectively. The SPDR S&P Metals & Mining ETF (XME) also invests in some of these stocks.