The Japanese manufacturing sector started the New Year in a positive way according to the latest PMI Manufacturing data. The January flash manufacturing PMI reading jumped to 52.8 from 51.9 in December. The latest reading was the strongest rate in nearly three years, helped by solid expansions in both output and new orders. The rise in total incoming new orders was driven in part by a sharp increase in international demand, as new export orders rose at the quickest rate in over a year. Meanwhile, inflationary pressures picked up to the greatest since March 2015.
Among the sub-indexes, five increased at a faster rate new orders, new export orders, employment, output prices and quantity of purchases. Output increased but at a slower rate. Three sub-indexes decreased but at a slower rate backlogs of work and stocks of purchases and of finished goods.
This will be positive news for the Bank of Japan and is sure to be discussed at its monetary policy board meeting on January 30 and 31.
The Purchasing Managers' Manufacturing Index (PMI) is based on monthly questionnaire surveys of selected companies which provide an advance indication of what is really happening in the private sector economy by tracking changes in variables such as output, new orders, stock levels, employment and prices across the manufacturing sectors. The flash index, usually released about a week before the final, gives a preliminary reading of conditions for the current month.
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the purchasing managers' manufacturing indexes, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.