An economic indicator is a piece of economic data, usually of macroeconomic scale, that is used by analysts to interpret current or future investment possibilities. These indicators also help to judge the overall health of an economy.

The most useful indicators are leading indicators that move ahead of the business cycle with a reasonable stable lead time. These can be used to predict what will happen next in the context of an economy. 

Traditionally, three consecutive months of increase (decrease) for the index are expected to signal the start of an economic expansion (contraction) is due over next few months. There are also coincident and lagging indicators that move with and after changes in the business cycle. These can be used to confirm what is happening in the economy.

The most commonly quoted leading indicator is the Purchasing Managers’ Index (PMI), which is an index of the prevailing direction of economic trends in the manufacturing and service sectors. It practically summarizes whether market conditions, as viewed by purchasing managers, are expanding, staying the same, or contracting. 

It is important to note that a reading above a level of 50 is considered to be an expansionary (bullish) dimension, while below 50 is contractionary (bearish). Apart from the direction, the magnitude of the current index is also important, and in a market reaction context, whether they are higher or lower than the average expectations of analysts.

Yesterday the flash PMI data for several countries was released, which was very positive overall, indeed pushing risk assets higher for most of yesterday’s session. They generally came in much stronger than expected and other data also showed that inflationary pressures remained strong, with numerous price gauges at their highest in years. 

Notably, the services PMIs reversed a prolonged contractionary trend to finally post strong gains after virus induced restrictions ravaged the service industry. Looking at the headline numbers, the Euro Area composite PMI rose to an 8-month high of 52.5 (vs. 49.1 expected), which brought an end to a four-month run when it had been in contractionary territory. 

Manufacturing in particular was incredibly strong, with the Euro Area manufacturing PMI climbing to an all-time high of 62.4 (vs. 57.6 expected), while services also outpaced expectations at 48.8 (vs. 46.0 expected). 

Records were being set in Germany too, with their manufacturing PMI at a record 66.6 (vs. 60.5 expected), and with the services number advancing back into expansionary territory at 50.8 (vs. 46.5 expected).

The UK PMIs were also well into expansionary territory, with the composite PMI at 56.6 (vs. 51.1 expected), and similarly both manufacturing and services advancing, at 57.9 and 56.8 respectively.

Over in the US the numbers were a little more subdued, but the services PMI still rose to 60.0 (vs. 60.1 expected), its highest in more than 6 years, while the manufacturing PMI matched the second fastest level since 2007 of 59.0 (vs. 59.5 expected).

The numbers are indicating that we may be past the initial recovery stage and entering the early expansion phase of the economic cycle. Economies are clearly gearing up for re-opening despite the currently slower than expected relaxation of restrictions in some European countries due to persistently elevated virus cases.

Disclaimer: This article was written by Simon Psaila, investment manager at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd, which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

For more information visit https://cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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