A Short Analysis on India’s October Manufacturing PMI: The Purchasing Managers Index (PMI) that was announced yesterday (Monday) for the month of October 2020 reflected an index of 58.9 which is the highest reading since May 2010. This index was at the level of 56.8 in September. Moreover, this surge in sales was the strongest since mid-2008. The news was taken enthusiastically by the economists as it indicated that fortunate unlocking amid COVID19 and improved demands in the market conditions.
In today’s article of Market Forensics by Trade Brains, we’ll be discussing what exactly is Purchasing Managers Index (PMI) and its implication on the financial market. Let’s get started.
What is Purchasing Managers Index (PMI)?
The Purchasing Managers Index (PMI) is an index explaining the prevailing economic trends in the manufacturing and service sectors. There are five major indicators used in explaining the Index – New orders, Inventory levels, productions, supplier deliveries, and the employment environment. The main purpose of PMI is to give a futuristic picture of the current and future business scenario and that enables the company owners, managers, and analysts to make an informed decision about the market.
How can one read PMI?
The PMI index ranges from 0 to 100 level. Any figure above 50 denotes expansion in the economy and any figure below 50 indicates contraction in the economy compared to the previous month. The further we are from the mid-point (50), it denotes more contraction and expansion in the economy. You can read more about how PMI is calculated here.
Here, the previous month’s data are very useful in doing a comparative study. Growth or decline in number as against the historical indexes for different months gives us information about the expansion or contraction in the economy.
Economic Implication of PMI
As Purchasing Managers Index (PMI) is the first data that is published every month, it is generally considered to be the leading indicator of the numbers which are yet to come. Other data like the industrial output, manufacturing output, GDP, etc., which are published later.
The Implications of PMI Data on Financial Market
The PMI data generally gives an indication of the corporate earnings. Good data indicates that the economy is lucrative to invest at current times vis-a-vis other countries having lower PMI data.
India’s October Manufacturing PMI Data
(Source: Historical Purchasing Managers Index (PMI)- IHS Markit)
India’s manufacturing PMI climbed to the highest ever in a decade on the back of a continuous surge in sales. The Nikkei’s Manufacturing Purchasing Manager’s Index, compiled by The IHS Markit, saw Manufacturing PMI rose to 58.9 in October, as against 56.8 in September and against market expectation of 55.4. This rise in PMI data can mainly be attributed to the following factors:
- The relaxation in COVID-19 restrictions and phased unlocking.
- New order hits its highest since mid-2008.
- The highest output advanced since late 2007.
- The rise in Export sales.
The Manufacturing PMI of 58.9 at its highest in the Last Decade, suggests that the third-largest economy of Asia is healing after a slump during the Pandemic COVID-19. According to Pollyanna DeLima, IHS Market- “Companies were convinced that the resurgence in sales will be sustained in the coming months, as indicated by a strong upturn in input buying and restocking efforts”.
That’s all for today’s Market Forensics. We’ll be back tomorrow with another interesting market news and analysis. Till then, take care and happy investing.
Hitesh Singhi is an active derivative trader with over +10 years of experience of trading in Futures and Options in Indian Equity market and International energy products like Brent Crude, WTI Crude, RBOB, Gasoline etc. He has traded on BSE, NSE, ICE Exchange & NYMEX Exchange. By qualification, Hitesh has a graduate degree in Business Management and an MBA in Finance. Connect with Hitesh over Twitter here!