The Philadelphia Fed business index for September is at 23.2. This is much better than the expected 2.5 and an improvement from -0.3 last month. Employment has dropped slightly to 5.6 from 5.9. Prices paid also decreased significantly to 46.8 from last month’s high of 66.8. New orders increased to 12.4 from -1.9 last month, and shipments rose to 26.1 from 4.5. Unfilled orders are down to -6.6 from -16.8, and delivery times improved a bit to -3.4 from -5.4. Inventories climbed to 15.0 from -6.2, and the average workweek expanded greatly to 14.9 from 4.7.

Six Month Outlook

Looking ahead six months, the index is at 31.5, up from 25.0 last month. The index for capital expenditures six months ahead fell to 12.5 from 38.4. Compared to last month, new orders, prices paid, and employment show mixed predictions. Earlier this week, the Empire Fed manufacturing survey fell to -8.7, which was worse than the expected +5.0 and down from +11.9 previously. A special question in the Philly Fed report indicates an increase in business activity. Today’s Philly Fed manufacturing report came as a big surprise, showing strong growth when only modest growth was expected. This contrasts sharply with the weak Empire Fed survey earlier this week, which indicated contraction. We need to keep in mind this regional economic divergence, which adds some uncertainty to the market. The report shows a solid rise in current business activity, with new orders and shipments bouncing back after being negative last month. The increase in the average workweek suggests firms are ramping up production quickly. This could mean a possible uplift in the industrial economy that hasn’t been accounted for in the market.

Inflation and Market Impact

Most importantly, the prices paid component dropped sharply, indicating that inflationary pressures are easing significantly despite the rise in activity. This corresponds with last week’s government data showing the August Consumer Price Index (CPI) cooled to 2.9% year-over-year. Strong growth combined with falling inflation is a perfect scenario for the Federal Reserve. Given this data, we can expect the market to lower the likelihood of any further interest rate hikes this year. The Fed can take its time, a point emphasized by the Chair at Jackson Hole just last month. Traders in derivatives should consider positions that benefit from stable or falling interest rates, like futures on the SOFR or Fed Funds rate. However, there’s a major warning sign: the plunge in the six-month forward capital expenditure index. While businesses are generally positive about the upcoming six months, they are cutting back on long-term investment plans. This suggests that the current strength may not last deep into 2026. These mixed signals call for a cautious yet opportunistic approach in the coming weeks. We recommend expressing a bullish view with a clear time frame. For example, consider buying near-term call options on the S&P 500 or industrial sector ETFs set to expire in October and November. We observed a similar mix in regional Fed surveys late in 2023, which led to a turbulent but ultimately upward market in the following months. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now