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Chapter 5 - Institute for Supply Management Indexes > HOW TO USE WHAT YOU SEE
HOW TO USE WHAT YOU SEE
The stock market tends to react in sync with movements in the purchasing managers’ index and production index. This is understandable because manufacturing activity, despite its reduced role, has proved to be a good representation of total economic conditions. When businesses foresee stronger consumer demand—as evidenced through declining inventories and acceleration in consumer spending—they pick up the pace of production. So, upticks in the purchasing managers’ index or the production index and postings higher than 50 usually portend better things for equity issues, because greater demand usually results in higher sales and subsequently, profitability.
Normally, the fixed-income market would react adversely to large increases in the purchasing managers’ index. In other words, higher postings, above 50, would be regarded as inflationary, thereby eroding the value of fixed-income securities, sending prices of bonds lower (and yields higher). Bear in mind that the ISM Report on Business also contains the price index, which also captures the attention of bond traders. The higher the value of the price index, the greater the inflation fear and the greater the sell-off in bonds. So, to better understand the fixed-income market reactions, Wall Streeters usually look squarely to the price index and the direction of any movement within as the ultimate inflation barometer of this report.