October Flash PMI Is Bullish for This Holding

In reviewing S&P Global’s Flash October PMI, which gives us the first hard look at how the manufacturing and services sectors performed during the month, we find the economy remained in growth mode with production and new order activity at elevated levels.

At the same time, job creation picked up with the fastest rate since mid-2022, with a quicker pace in the manufacturing economy. Those finding suggest the Fed will be less worried about the pace of the domestic economy and job creation, leaving it to focus its attention on inflation.

We’ve been hearing more about the follow through of higher commodity and other input costs from management teams during the current earnings season. While gas and diesel prices are lower compared to month-ago levels, both remain well above year-ago levels. There is also the continued rebound in oil prices following their fade during the second half of September and their recent low in October low. Against that backdrop, selling price inflation picked up further momentum in October.

Per S&P:

The overall rise in prices across goods and services was the largest since August 2022. The upturn in price pressures was also broad-based: while services inflation edged up to the steepest since August 2022, manufacturers’ selling prices rose at a pace not seen since July 2022, with the rate of inflation accelerating markedly.

Higher prices reflected a further sharp increase in companies’ costs. Average input costs measured across both goods and services rose at the fastest pace since November 2022, excluding only the rise seen in September. The surge in cost pressures was most prominent in manufacturing, though service sector costs also rose sharply again.

Respondents commonly cited oil-based inputs, energy, fuel and freight rates as having pushed costs higher, but various other raw materials including steel, aluminum and copper were also up in price, often due to tariffs or shortages… Service providers also widely noted higher wage rates and increased utility and insurance costs.

The above points to the end customer facing inflation and that includes consumers, and it suggests we are likely to see another move up in year-over-year inflation figures when we get the October CPI and PPI data on November 10 and 11, respectively. You’ll notice that comes well after the Fed’s policy meeting next week and if those October figures step up from their September counterparts, we could see market chatter start to contemplate a potential 50-basis point rate hike at its early December policy meeting. Current expectations captured by the CME FedWatch Tool currently see that probability at 8.0% with more than a 70% one for a 25-basis point rate hike.

For next week’s policy meeting, the market is not calling for a rate hike but based on the Flash October PMI report and the recent trend in oil prices, at a minimum we’re likely to get some incrementally hawkish comments from Federal Reserve Chair Warsh.

In terms of the Portfolio, early this week we discussed why we would be watching Friday’s Flash October PMI report with the shares of Paccar (PCAR) in mind. The continued strength in the manufacturing economy bodes well for new truck demand, and that keeps us bullish on PCAR shares as well as inclined to add to the Portfolio’s position.

More Pro Portfolio

At the time of publication, TheStreet Pro Portfolio was long PCAR shares.