Purchasing Manager Surveys and the Early Signal

Most economic data describes the past. Employment figures cover last month; growth figures cover last quarter. Purchasing manager surveys are different: they ask managers in factories and service companies what is happening right now and what they expect next month. That makes them one of the earliest readings on where an economy is heading.

How to read the number

The surveys are reported as an index around a central value. Above it, more managers report expansion than contraction; below it, the reverse. The level matters less than the direction and the distance from the midpoint. A reading that is falling toward the midpoint from above is an early warning; one that is rising toward it from below is an early sign of recovery.

Within the survey, a few components deserve attention:

• New orders, which lead production
• Employment intentions, which hint at the next jobs report
• Prices paid, which feed into inflation expectations
• Supplier delivery times, which reflect supply chain pressure

Why markets react

Currencies react because the surveys shift expectations for central bank policy. A sharp fall in a service-sector survey can bring forward expectations of rate cuts. Equity indices react because new orders are a direct read on company revenues. Commodity currencies react to manufacturing surveys in the large importing economies.

Flash readings, released before the final number, carry the most surprise and therefore move markets the most. The final reading is often a quiet affair.

A practical approach

Keep a simple note of the direction of the manufacturing and services surveys for the economies behind the pairs you trade. When both are rising, favour the currency and its index on pullbacks. When both are falling, be careful with long positions and quicker to take profit. When they diverge, the services survey usually matters more for the currency because services make up most of a modern economy.

What to watch

Watch the new orders component, the gap between the flash and the final reading, and whether the survey direction is confirmed by hard data a month later. A survey that improves while employment keeps weakening is a signal to doubt until confirmed.