US manufacturing data from S&P Global shows that the final PMI for August is 53.0, slightly down from the initial estimate of 53.3. However, this is an improvement from July’s reading of 49.8, marking a three-year high. Input cost inflation increased, representing the second-highest rise in three years. New data from the ISM manufacturing survey and construction spending will be released soon. The last three months have seen the strongest growth in production since early 2022, thanks to rising sales. Factories added jobs in August due to new orders and unfinished work. The sector is expected to support the US economy in the third quarter, partly due to building up inventory. Factories increased their warehouse stock in August because of concerns over future price hikes and supply issues. Tariff impacts are adding to these input price increases. As a result, factories are raising prices for customers. The effect of these price hikes on consumer inflation in the upcoming months is still uncertain. The August manufacturing report shows that the economy was performing well over the summer, a stark contrast to the slowdown in July. This strong performance, the best since early 2022, suggests potential growth for stocks. However, a key concern is the sharp rise in input costs due to tariffs. This inflation at the factory level poses a challenge to the Federal Reserve’s current policy. With the latest core CPI still at a high 3.1%, any signs of a further increase could lead to a rate hike before the end of the year. We are therefore considering interest rate derivatives that could benefit from the Fed needing to tighten its policy again. The tension between strong growth and rising inflation creates uncertainty that we think the market hasn’t fully accounted for. The VIX volatility index recently dipped below 15, making options relatively inexpensive. This is a good opportunity to buy protection or create trades, such as straddles on the SPX, which could profit from significant market moves in either direction. We also observe that this manufacturing boom is partly due to companies building inventory to stay ahead of price increases. This pattern mirrors what happened during the supply chain disruptions of 2021-2022, when a rapid downturn followed once warehouses filled up and demand declined. This indicates that while industrial sector stocks may benefit in the short term, we should be wary about their performance as we approach 2026.

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