The world’s largest economy is booming, apparently.
In the normal course of things, I don’t cover S&P Global’s PMI releases for the US. I used to, but the ISM gauges are so dominant in terms of tradability that I saw little use in documenting the ebb and flow of the alternative surveys.
But on Wednesday, flash reads for September on S&P Global’s gauges printed anomalous upside surprises that moved bonds meaningfully, so I’m obliged to mention the prints.
The figure above shows you the factory gauge which, at 57, overshot consensus by a mile. That’s the highest print since the spring of 2022.
The services and composite headlines were likewise robust at 58.7 and 58.4, respectively. The former’s a 59-month high, the latter a 62-month best. For additional context, consider that consensus for the composite metric was just 55.3.
The subindexes were very strong. The employment gauge, for example, hit 55.4, indicative of the broadest payrolls expansion since the summer of 2022. On the demand front, new orders jumped three points to 58.2, the highest since the Fed started raising rates in March of 2022. Backlogs expanded at the briskest rate in years.
It won’t surprise you to learn that some (a lot) of the “strength” is explainable by way of supply distortions. Rising backlogs, for example, reflected “intensified” supply chain delays and “a lack of operating capacity,” which “fed through to higher prices.”
Chris Williamson, S&P Global’s long-time chief economist, said Wednesday that if you exclude the rebound from the original pandemic lockdowns, this month’s upsurge in business activity counts as the most pronounced expansion in over a decade. “Business is clearly booming now in both manufacturing and services,” he said, adding that Q3 growth’s tracking at 4%.
But, as we’ve seen time and again this decade, robust demand against constrained supply is a combustible conjuncture. “While th[e] accumulation of uncompleted orders bodes well for the further expansion of output and capacity in the coming months, it also indicates that companies are developing more pricing power, and hence is a worry for the inflation outlook,” Williamson went on, noting that input costs rose this month “at the steepest rate for four years” driven (no pun intended) by higher fuel and transportation costs.
As noted above, the reaction in US rates was fairly dramatic: An (almost) parallel 10bps selloff from twos through the belly. 20s and 30s outperformed, with yields rising a comparatively modest 8bps and 7bps, respectively.
There’s a chart. Sorry, the chart. The morning high for benchmark US yields was 5.07%, give or take, a new “since 2007” high.
The bond selloff felt a bit escalatory, and it came amid hawkish comments from Michael Barr, who said additional rate hikes will likely be necessary. “Risks to achieving our inflation target have increased,” he said, in prepared remarks for an event hosted by the Chicago Fed.
“In my view, given changes to the economy, we were out of position,” Barr went on, suggesting the Fed had fallen behind the curve prior to this month’s hike. “In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion.”
Commenting on the PMI data, BMO’s Vail Hartman said the scorching-hot prints “impl[y] ample latitude for both policy rates and Treasury yields to push higher in the near-term.”
Hartman put the readouts in the context of hopes for lower oil prices. “If anything, the data reinforces the risk of a renewed acceleration in demand-driven inflation even if supply-side inflation subsides,” he cautioned.
