Chicago Data Found to Be Economic Trend Predictor
A report on regional manufacturing conditions in the Chicago area moves currency markets more than any other major economic indicator because it accurately predicts trends for the U.S., a study by Merrill Lynch & Co. found.
The National Assn. for Purchasing Management-Chicago regional business index was the biggest currency market mover over the last two years, according to a report by Alex Patelis, a currency strategist at Merrill Lynch in London.
“The manufacturing sector usually leads other sectors of the economy and is responsible for a disproportionately high share of fluctuations in the business cycle,” Patelis said in a note. The Institute for Supply Management’s national manufacturing report was the biggest market mover over the last eight years, it said.
Patelis compared the U.S. dollar’s movement against the euro and the yen on days of 19 major economic reports from the currency areas. He found that U.S. indicators typically move the dollar versus both currencies, while Japanese reports move the dollar only versus the yen and European data are “not usually market moving.”
Unexpected weakness in the Chicago purchasers’ report pushed the dollar down on March 31. The dollar fell 1.2% against the euro and 1.5% against the yen that day after the index tumbled 9.4% to 57.6, the biggest drop in three years.
The Chicago report “is an important market mover even though the region covered is only a small subset of the overall nation,” because it accurately predicts the ISM manufacturing index and trends in U.S. manufacturing, the report said. The Chicago group is a chapter of the Institute for Supply Management.
The two purchasing managers indexes also are released before government reports on the month’s economic activity, adding to their importance, Patelis said in the report.
Manufacturing employment has fallen to 11% of U.S. payrolls in September, from 24% 30 years earlier. Still, the Chicago purchasers report and the ISM index predicted the 2001 recession accurately, according to the study. Both began to decline more than a year before the recession officially began.
The Labor Department’s consumer price index and employment reports also ranked high on Patelis’ list. The jobs report became more important this year, as Fed policymakers promised to hold interest rates low until the economy started adding workers. The employment report sparked three of the four biggest moves in the U.S. dollar this year, according to the report.
The single biggest currency market mover of the last year was the May 7 U.S. employment report, Patelis said. The dollar rose 2.2% against the yen, the most since June 1999, and 1.6% against the euro that day after the Department of Labor reported that the economy added 288,000 jobs in April.
