Open up the economic calendar and chances are you will see some mention of manufacturing PMI data. They typically attract the same attention as other publications such as GDP, employment figures, inflation numbers and the like. But what exactly is a manufacturing PMI?

PMI stands for Purchasing Managers’ Index. A PMI is a diffusion index, which is a tool used in economics to evaluate the general trend of a series of data points. It works by looking at the direction of each component in a group and then telling us what the overall direction of the group is.

For example, let’s take a group of ten businesses to evaluate their overall growth trend. Nine report a 10% reduction in activity; one reports a twofold increase. In this instance, calculating the average growth would give us a positive figure, which is true, but ignores the fact that most of those businesses are in decline. A diffusion index on the other hand would instantly let us know that the overall trend is firmly negative.

In the case of the manufacturing PMI, the figure is calculated according to the following formula:

                                                                                       PMI = [G × 1] + [NC × 0.5] + [D × 0]

Where:

G: Percentage reporting growth
NC: Percentage reporting no change
D: Percentage reporting decline

How are the above data collected? It is actually as straightforward as asking people in key industrial positions what they observe, typically on a monthly basis. A PMI is essentially the result of survey data. A corporation or government body will contact senior executives working at hundreds of companies across all sectors of industrial activity and ask them for specific information about their company’s performance.

The information in question revolves around new orders, inventory levels, production output, supplier deliveries and finally employment within the company. Once everything has been collected, the overall PMI figure can be calculated based on the number of businesses reporting growth, contraction or simply no change at all. A PMI above 50 indicates a sector in expansion; a PMI below 50 indicates a sector in contraction.

You may be forgiven for thinking that the above methodology does not sound very scientific or objective. There will obviously be errors involved, inaccurate information, inherent biases on behalf of the reporting staff etc., not to mention the fact that the companies surveyed may not necessarily reflect broader industrial trends. On top of that, the exact way of collecting and processing the data may vary from country to country. These problems are by no means limited to PMI data by the way. For example, inflation and employment statistics face the same hurdles and often undergo significant corrections in the months following publication.

If anything, PMI figures are some of the more reliable on the economic calendar. It is a relative measure after all; the question really boils down to “is this month better or worse than the previous one”. Given that they provide new information relating to industrial trends, PMI data are considered leading indicators, offering insights into the economy before they manifest in the labour market or in GDP figures for example.

The credibility of PMI figures is further bolstered by the fact that huge entities such as S&P Global publish such data on an international scale, harmonising the process across many different areas of the world. Indeed, S&P Global covers 45 distinct economies, allowing for more consistent comparisons to be made between different countries.

Many countries will have several different bodies that calculate PMI data, such as the Institute for Supply Management in the US for instance, which publishes alongside the S&P Global but uses a slightly different methodology. In China, the National Bureau of Statistics and Caixin Indices both convey PMI data, with the former focusing on larger and state-owned enterprises and the latter being much broader in scale.

Of course, a PMI is not limited to the manufacturing sector. Similar calculations are made for other areas of the economy, such as the service or construction sectors. Services are in fact a much larger contributor to GDP than manufacturing, particularly in developed countries, so why the focus on manufacturing? Tradition is a large part of it; the manufacturing PMI dates back to the 1940s and predates the service index by half a century. It is also considered the more concrete of the two, given the more nebulous nature of the service sector. Fundamentally, most of us probably attribute more value to building airplanes than to ordering cappuccinos from each other, a stance which underlies much of the criticism of the aforementioned GDP figures. Whatever the reason, manufacturing PMIs remain a staple of the economic calendar and this is unlikely to change.

Stocks rejoiced yesterday following the Fed’s move to lower the target interest rate on the Dollar by half a percent. The three major US indices opened high on Thursday after markets had had more time to digest the decision. The Dow Jones and S&P 500 both struck record highs, closing 1.3% and 1.7% higher respectively. The Nasdaq Composite meanwhile gained 2.5% on the day but remains somewhat adrift of its July peak.

The prospect of a more liquid Dollar spurred on commodities, pushing gold up 1% to $2,586 and nudging silver over $31 an ounce. Oil markets are also enjoying some respite, with West Texas Intermediate in particular climbing back to $72 a barrel and Brent Crude up to $74.

Moving on to currencies and the picture is as one might expect. The Dollar experienced a healthy dose of volatility over the past two sessions but now seems to be coming to terms with the news. The DXY lost 0.3% on Thursday and is now languishing around its yearly lows. On the other side of the pond, the Bank of England elected to maintain the 5% interest rate on the Pound during yesterday’s meeting, which helped push Cable up to $1.33. This morning, the Bank of Japan followed suit, keeping rates on the Yen at 0.25% as expected. Japanese officials made an effort to reassure markets after the drama caused by the last rate hike, stating that further adjustments would not occur until markets stabilise.

All quiet ahead of the Fed’s interest rate decision later today. There has been a last minute pivot away from predictions of a 25 basis point cut in favour of a more bold 50 bps reduction in the target rate. FedWatch is now pricing the larger cut at a 65% probability. The reasons for the shift aren’t clear and markets have been very timid so far this week, so no clues there.

The Dow Jones edged out another record high on Monday after a 0.55% rise, but overall US indices are in wait-and-see mode until the Fed makes up its mind. The same can be said for currencies; the Dollar fell on Monday, with the DXY losing the 101 level, only to reclaim it the following session. Traders can expect some degree of volatility both before and after the announcement, by the looks of things a lot of market participants are staying out of the game until then.

Gold also eked out another record high on Monday, climbing a few Dollars just for the sake of it before closing half a percent lower on Tuesday. Oil has finally showed some strength, with Brent and WTI up around $5 a barrel since last week’s lows, although once again there doesn’t appear to be an obvious reason as to why. It will be interesting to see how cryptocurrencies react to the Fed interest rate decision later today. Crypto markets have been uncharacteristically boring recently, with BTC hugging $60k and Bitcoin dominance at yearly highs of 58%.

The time is almost upon us. In just a few days the Federal Reserve is expected to enact its first interest rate cut, an event that markets have been trying to price in all year. Odds changed over the weekend, with a larger 50 basis point cut now favoured by interest rate traders. The Dollar slid marginally on Friday and continued to do so this morning in Asia in light of shifting expectations. Gold on the other hand powered its way to a second consecutive record high on Friday after gaining another $20 an ounce.

Absolutely nothing on the economic calendar today, although it is worth mentioning that both Japanese and Chinese markets are closed, leading to bone dry liquidity early on. Retail sales and CPI figures make up the bulk of the economic data this week, but of course the main attraction is the FOMC meeting which starts on Wednesday. The major US indices enjoyed strong gains last week, with the S&P 500 and Dow Jones Industrial Average finishing just under their respective record highs, potentially paving the way for some big moves if markets don’t get the rate cut they expect. The Bank of England and the Bank of Japan will also vote on their respective interest rate targets this week, but neither is expected to deviate from their present levels.

It all boils down to the Fed. Traders will be jostling for position ahead of the decision, which will no doubt remain the subject of intense speculation right down to the wire.

Gold hit a new record high yesterday, finally leaving the consolidation range it had stuck to for most of the past month. The precious metal closed at $2,558 an ounce on Thursday after gaining almost $50 on the day. The move appears to have maintained some momentum this morning in Asia, reaching as high as $2,570 at one point.

US economic data over the past couple of days fell close enough to expectations to not spook markets, and most importantly not giving the Federal Reserve any reason to deviate from their stated course. CPI data was a mixed bag overall; year-on-year inflation fell to 2.5%, marginally edging ahead of expectations; core inflation however came in slightly above consensus. The following day, jobless claims brought no surprises. Odds for next week’s interest rate decision continue to fluctuate, slightly favouring the smaller 25 basis point cut at the time of writing. There are now very few hurdles between now and next week’s decision.

In a widely telegraphed move, the European Central Bank lowered rates on the Euro yesterday, slashing a quarter percent off the deposit facility rate. The refinancing rate – the rate at which the ECB lends to banks – underwent a much larger 60 basis point haircut. The decision fuelled a rise in the Euro against the Dollar, with the DXY falling half a percent.

Oil prices finally received some leniency after hurricane Francine forced producers to evacuate rigs in the Gulf of Mexico. Remains to be seen whether the rebound will have any lasting strength or if long-term forecasts will continue to weigh on crude prices.

Markets are cautious ahead of US inflation data later today. Estimates are forecasting a drop to 2.6% year-on-year, down from 2.9% on the last print. With only one week to go before the next FOMC meeting, market participants have their fingers crossed that the publication will not produce any nasty surprises and the same goes for tomorrow’s PPI figures. FedWatch is currently pricing in a 25 basis point cut at a 65% likelihood.

On the topic of rate cuts, tomorrow the European Central Bank is widely expected to lower its deposit facility rate another 25 basis points. This would be the second such cut, lowering rates on the Euro down to 4% from highs of 4.5% earlier in the year. The Bank of England, Swiss National Bank and Swedish Riksbank have all lowered rates on their respective currencies this year, with the Federal Reserve the only major bank so far not following suit.

The Dollar regained some ground early in the week but looked fragile this morning in Asia - a weakness that the Yen was all too happy to capitalise on, gaining over 1% on the greenback at one point. Gold continued to familiarise itself with its current tight trading range around $2,510 an ounce. Yet again, the bulk of the drama was to be found in oil markets. Demand forecasts continue to paint a bleak picture and crude prices have reacted accordingly, tumbling another 3% yesterday alone. Brent Crude finally lost $70 a barrel and WTI touched $65 during Tuesday’s session. Both are now at yearly lows.