The New York Fed’s manufacturing index for August rose to 11.90 from 5.500 last month, surpassing the expected 0.00. This is the highest level since November 2024. The general business conditions index increased by six points to 11.9. The new orders index jumped 13 points to 15.4, indicating strong growth in orders, while the shipments index held steady at 12.2. In contrast, the inventories index fell by 22 points to -6.4, signaling a drop in stock levels. The employment index slightly increased to 4.4, suggesting small job growth, while the average workweek remained around zero. Delivery times extended as supply issues worsened, impacting these trends.

Price Changes

In terms of prices, the index for costs paid stayed high at 54.1, indicating ongoing increases in input costs. Meanwhile, the prices received index dropped to 22.9, showing moderate growth in selling prices. Although the future outlook index fell 8 points to 16.0, there is still optimism. Many firms expect new orders and shipments to rise, but two-thirds predict more input price hikes in the next six months. Plans for capital spending seem to be low. The August manufacturing report surprised everyone with its strength. This unexpected boost, along with high input prices, gives the Federal Reserve more ability to maintain higher interest rates. We can expect that market predictions for near-term rate cuts will likely be pushed back to early 2026. This scenario reminds us of the inflation challenges of 2023 and 2024, where strong economic data led to rising government bond yields. Data from the CME FedWatch tool will likely show a decreased chance of a rate cut before the year’s end compared to last week. This could make strategies that profit from rising yields on 2-year and 10-year Treasury notes more appealing.

Impact on Stock and Bond Markets

For stock markets, strong new orders are positive for industrial company revenues this quarter. However, the risk of higher interest rates persisting may suppress stock valuations, creating a challenging environment. This tension could lead to more market volatility, making strategies that benefit from rising volatility, like buying call options on the VIX index, more attractive. We should also closely monitor longer delivery times and declining inventories. These indicate supply chain issues, similar to those that disrupted corporate earnings in 2022. This situation could squeeze profit margins again, as companies face higher material costs but lower selling prices for finished goods. The decline in future business outlook and weak capital spending plans is concerning. It suggests that while companies are busy fulfilling current orders, they are reluctant to invest in future growth. This could support a pair trade strategy, such as being long on commodities affected by current demand while being cautious with industrial stocks reliant on future investment. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now