The S&P Global US Manufacturing PMI for August 2025 is 53.3, beating the estimated 49.5. The Services PMI reached 55.4, also higher than the expected 54.2. The Composite PMI index rose to 55.4 from 55.1 in July, hitting an eight-month high, with output and demand increasing for 31 months straight. Manufacturing output saw its largest monthly growth since May 2022, and new orders hit their highest level since February 2024. These figures align with an economy growing at an annual rate of 2.5%, up from 1.3% in the first half of 2025. Rising demand has led to significant backlogs and a record pace of finished goods stockpiling.

Rising Input Prices

Due to tariffs, input prices rose at the fastest rate since May 2023, the second-largest increase since January 2023. Inflation pressures are at a three-year high, indicating the consumer price index might exceed the Federal Reserve’s 2% target. Employment growth has continued for six months, the fastest pace since January 2025. Backlogs have led to manufacturing and services hiring at their highest levels since March 2022 and May 2022, respectively. Business confidence is at a two-month high, though it is still below levels seen in early 2025. The growth outlook for Q3 is a healthy 2.5% annualized rate, but inflation risks persist due to ongoing tariff pressures, which may lead to higher yields and a stronger USD. The August PMI report significantly alters our outlook. The manufacturing index rise to 53.3, compared to the 49.5 estimate, suggests a stronger economy than we expected. This challenges market predictions for a Federal Reserve rate cut in September, which still has a 79% probability of occurring. We need to rethink our interest rate strategies. The 2-year Treasury yield, which was around 4.4% last week, is very sensitive to Fed policy changes and is likely to rise sharply after this news. It may be wise to sell short-term interest rate futures, like those tied to the Secured Overnight Financing Rate (SOFR), to prepare for the market adjusting to a more hawkish Fed.

Good News Is Bad News Scenario

For equity traders, this “good news is bad news” scenario could lead to increased market volatility. Strong economic growth may boost earnings, but the possibility of higher interest rates for a longer duration will pressure valuations, as we saw frequently in 2023. We should brace for fluctuation in the S&P 500 and consider options strategies like straddles or buying calls on the VIX index, which is currently near a low of 13. The US dollar can significantly benefit from this situation. As the US economy accelerates at a 2.5% annual rate, while new data shows sluggish growth in Europe, the case for a stronger dollar strengthens. We should consider taking long positions on the dollar, perhaps through call options on the U.S. Dollar Index (DXY) or against currencies like the euro. Lastly, the report highlights rising input costs and the fastest increase in selling prices since August 2022, suggesting inflation is resurging. The impact of tariffs and the record stockpiling of finished goods indicates ongoing price pressures. This environment could favor options on inflation-linked bond ETFs or specific industrial commodities that benefit from both robust manufacturing and inflationary trends. Create your live VT Markets account and start trading now.

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