Flash PMI Signals Strong Economy, But Raises Inflation Worries
A pick up in jobs will keep the Fed focused on inflation, but the report is a flag for corporate margins and EPS.
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The stock market moved lower as Treasury yields ticked higher following the much stronger-than-expected September Flash PMI report that landed at 9:45 a.m. ET. Coming into the week, we said the report and its findings would be the most important pieces of economic data to watch, and that certainly looks to be the case. In addition to the headline manufacturing and service figures coming in well ahead of market expectations and the readings for August, the pace of job creation accelerated in both parts of the economy, with the same true for inflation pressures.Â
The September Flash PMI data point to a domestic economy that is continuing to hum, but it also confirms that the Fed’s dual mandate focus will remain on inflation, given the rebound in job creation. Of course, these results are preliminary and we’ll want to see the September PMI data from the Institute for Supply Management for confirmation. That said, we’ve talked quite a bit about the climb in oil, diesel and related prices, and today’s findings not only confirm that, but speak to their follow through across the wider economy.Â
Reading between the lines on what the Flash PMI data found on inflation (see below) and following negative earnings pre-announcements from Nucor (NUE), Steel Dynamics (STLD), and JB Hunt (JBHT) plus warnings from multiple airlines, we see more reasons to think the market will come around to our concern about lofty consensus earnings per share expectations for the S&P 500 for the second half of 2026 and for 2027.Â
Given that growing concern, we’ve already raised the Portfolio’s cash levels to back over 12%. We’re closely watching opportunities to snatch up shares of existing holdings, and have discussed more than a few of those with you in recent days. We’re also looking at other opportunities, should quality companies go on sale as the Q3 2026 earnings season gets underway.
September Flash PMI on Job Creation
Employment consequently rose in September at a rate not seen since June 2022 and a pace rarely exceeded since comparable data were first available in 2009. Both service sector and manufacturing payrolls increased, the former at the fastest rate since June 2022 and the latter notably to the greatest extent since February 2021.
September Flash PMI on Inflation
Price pressures intensified in September. Average input costs measured across both goods and services surged higher, the overall rate of inflation hitting the highest since October 2022. The increase was blamed widely on higher fuel and transport costs, though wage pressures were also noted to have picked up in many cases.
In manufacturing, high raw materials prices were also often linked to supply shortages; suppliers’ delivery times lengthened markedly again in September on average, with the incidence of supply chain delays the most widespread since July 2022… Selling price inflation also picked up in September, though was muted by competition in some instances, notably in the service sector. While above that seen in August, September’s overall selling price rise was below the rates seen between March and July.
Rising input prices but comparatively muted selling price inflation is a flag for us on margins and bottom- line performance.Â
At the time of publication, Versace had no position in any security mentioned.
