Flash August PMI Report Boosts Rate Cut Likelihood
But inflation comments point to margin pressure, raising questions about EPS growth assumptions.
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Today’s headline Flash August PMI data showed the domestic economy slowed modestly in August. But when we dig deeper, we find the manufacturing economy cooled further, employment fell in August, and output inflation slowed, even though reported input costs ticked higher. That should be all be positive for those hoping the Fed will start a rate-cutting cycle in the coming weeks.
When we look at the current market expectation for rate cuts, the majority view depicted in the CME Fed Watch Tool is for the Fed Funds rate to be between 425-450 basis points, compared to the current range of 525-550. This leaves room for the market to be disappointed tomorrow if Fed Chair Jerome Powell’s comments are not as dovish as hoped.
At Your Services
The Flash August PMI report also shows the economy continues to be propelled by the services sector, and with a composite output figure of 54.1 for the month. It should allay near-term recession concerns. Rising new order levels for services, which hit the second highest level in 14 months, suggests that strength will continue. But new manufacturing orders tumbled. Netting out those findings suggests the economy is likely to cool further in September, indicating a glide path for soft landing for the economy.
We will want to confirm those new order findings when we get the August PMI data from ISM in early September. Comparing today’s Flash August PMI report against the final August PMI data from S&P Global should help us understand any harm from the dual Canadian rail stoppages, assuming that isn’t settled in the coming days.
Paycheck Chech
The August Flash PMI data did give insight into falling employment, too. Job gains fell in the service sector and stalled in manufacturing. All told, this pointed to the smallest payroll gain so far this year. That will not go unnoticed by the Fed.
Price Concerns
The report’s findings were also a potential warning sign for margin and earnings per share pressure in the coming quarters. We say this because output prices are rising slower than input prices, which are being lifted by higher costs for staffing, raw materials, and shipping. It also adds another layer of criticism for the market’s current expectation that S&P 500 EPS will grow 15% year over year in 2025. When companies hit the September investor conference trail, we will be focusing on their comments about margins for the coming quarters.
At the time of publication, the Pro Portfolio has no position in any security mentioned.
