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Why manufacturing and the auto sector impact bond returns

Phalguni Soni

Why this might be 2014's most pivotal week for financial releases (Part 5 of 7)

(Continued from Part 4)

Chicago Purchasing Managers’ Index (or PMI)

The Institute of Supply Management-Chicago (or ISM-Chicago) will release the Chicago Business Barometer or Chicago PMI reading for April on Thursday, May 1.


What is the Chicago Purchasing Managers Index (or PMI)?

The Chicago Business Barometer or Chicago PMI is issued by ISM-Chicago, an affiliate of the Institute for Supply Management, monthly. The PMI is a regional gauge, measuring business activity in the U.S. Mid-West based on a survey panel of purchasing or supply-chain professionals, primarily drawn from members of ISM-Chicago. Panelists may include professionals from both manufacturing and non-manufacturing companies.

The Chicago PMI is a composite index composed of Production, New Orders, Order Backlogs, Employment, and Supplier Deliveries indicators. It’s designed to predict future changes in gross domestic product (or GDP). Index readings above 50 indicate month-on-month expansion in business activity, while readings below 50 indicate contraction. A result of 50 is neutral. The farther an indicator is above or below 50, the greater or smaller the rate of change.

Highlights from the March report

  • The Chicago PMI for March declined to 55.9, its lowest level since May 2013. The reading, however, was over the critical level of 50, implying that business activity had expanded at a decelerating rate.
  • The various indices comprising the PMI moved in different directions, with new orders and order backlogs showing an increase in activity, the Employment Index neither expanding nor contracting, and finished goods inventories and prices paid falling to their lowest levels since July and April 2013, respectively.
  • Production expanded to a nine-month high, underlining manufacturing’s contribution to the recovery.

Fed Chairwoman Janet Yellen, in a recent speech at The Economic Club in New York, particularly underlined the resurgence of manufacturing in the nation’s economy. She also said that the auto sector has “led” this resurgence. To read more about what Janet Yellen said about full employment and other aspects of the economic recovery, please read the Market Realist series  Janet Yellen’s speech hints on what the Fed dashboard looks like

What investors can expect from April’s report

The Chicago PMI hasn’t declined as much as the other PMI readings, such as the ISM and Markit, over the weather-affected months of January and February. In fact, they actually showed an increase in the manufacturing growth rate in February. Although the growth rate fell in March, the majority of businesses have reported that demand would pick up over the next three months, which should support the April reading.

Manufacturing activity increases will directly impact companies in the manufacturing sector like Ford (F) and General Motors (GM). Both companies are part of the S&P 100 Index (OEF). One way to invest in Ford (F) and General Motors (GM) is through purchasing shares in the iShares S&P 100 ETF (OEF), which tracks the S&P 100 Index. The index is a market cap–weighted index that tracks the performance of 100 blue-chip companies from a cross-section of industries.

Car sales are also a very important consumer confidence indicator, because they’re a big-ticket purchase. Increasing auto sales would mean the economy is growing, as all else equal, the Fed would begin raising the base rate. This would impact rates across other maturities as well. As interest rates and bond prices move inversely, this would also imply lower bond prices. Investors can benefit from a rising rate environment by investing in inverse ETFs like the ProShares Short 20+ Year Treasury Fund (TBF) and the Barclays iPath US Treasury 10-Year Bear ETN (DTYS). Inverse bond ETFs provide the inverse return of the underlying benchmark index.

Continue to Part 6

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