Let’s zoom in on a macroeconomic publication that caused a jump in the yields of 10-year federal sovereign bonds on Monday, December 5: the PMI ISM “Services” index came out sharply higher at 56.5, largely beating the target. Elements of contextualization, explanation and interpretation.
What is it about ?
The PMI ISM index is a barometer of activity, calculated after analysis and processing of a past survey of 300 purchasing managers, on a representative sample. Hence the acronym PMI, for Purchasing Managers’ Index. As for the acronym ISM, it is simply the name of the institute that publishes the indicator: The Institute for Supply Management, which is the historical professional association of the purchasing and supply function.
It is therefore a leading indicator of economic health – with companies reacting quickly to market conditions and their purchasing managers probably holding the company’s earliest and most relevant insight into the economy.
There is an industrial version (the best known, the famous manufacturing ISM), and a service version (more recent, since 1998, which interests us here).
Why Purchasing Managers?
It is quite simply because, as we have just briefly mentioned, these professionals are on the front line, upstream of the chain, and constitute, through their feelings, an excellent barometer of demand, which will moreover be confirmed or later reversed. This is why we speak of “leading” indicators. And their value is precious! In the past, similar indicators existed, more or less reliable. Some were based in part on the order books of packaging box manufacturers, quite simply…
A strong departure from the consensus
On Monday December 5, the ISM Services (or non-manufacturing) index came out at 56.5 for the month of November, up 2.1 points, well above the target (i.e. market consensus), which was at 53.5. To see an example of the publication , here is the link, for the most curious.
Note for interpretation that a score above 50 points signifies an expansion of the sector considered, and conversely, a score below signifies a contraction. Naturally, the deviation from this 50 point mark is significant and gives meaning to the estimated magnitude of this upcoming expansion or contraction. This bar is ultimately only a construction that fixes a dead point.
If in Europe, the PMI by IHS Markit*, equivalent indicators, are closely followed, in particular the German industrial component, in the United States, where both are available (IHS and ISM), the second has much more impact, traditionally , than the first, with a comparable deviation from the consensus. Its reading will therefore be privileged in the trading rooms.
Some elements of interpretation, in this case
With 6.5 points above 50 points, the score showed not only resilience, but the beginning of a warm-up on the services component. We will talk about the surprise solidity of an entire section of the world’s largest economy, a robustness that resonated with the federal NFP employment report published on Friday, resulting in much more job creations than had been expected. the projections of economists and analysts. And it was the combination of the two (ISM and NFP) in a short period of time that gave the market a chill, sweeping away hopes, in the short term at least, of a slightly more accommodating Fed.
Alexandre TIXIER for Fibee
*formally S&P Global since the S&P Global – IHS Markit merger.