The ISM's July manufacturing index rose to 55.6, its best level since May 2022, but the survey's price gauge marked a 22nd straight month of increases. Persistent price pressures and stronger growth estimates are adding to pressure on Federal Reserve Chairman Kevin Warsh to raise interest rates at the September meeting, even as traders remain only mildly skeptical of a hike.
The Institute for Supply Management's July survey put its manufacturing index at 55.6, the highest reading since May 2022, above Wall Street's forecast for 54.0. Yet the report's price index edged lower to 71.1, marking a 22nd straight month of rising prices, sharpening pressure on the Federal Reserve to raise interest rates in September.
Price pressures test the "worse than Covid" line
Nearly three-quarters of ISM respondents said prices kept climbing, with purchasing managers pointing to a volatile environment tied to tariffs and the Iran war. One respondent in the primary metals industry compared current conditions unfavorably to the pandemic era: "No normalcy in sight in the world of metals." A manager in the electrical equipment sector said pricing volatility and lead-time extensions are arguably worse than during Covid-19, when price hikes eventually leveled out; this time, the manager said, pricing and lead times show no sign of slowing.
June's data looked fairly positive as energy and shelter costs eased, though virtually all pricing gauges still sit well above the Fed's 2% target. Still, analysts said continued inflation pressure would likely force the Fed's hand.
Growth estimates climb alongside the price pressure
Following the ISM report, Goldman Sachs said it is tracking third-quarter economic growth at 2.4%, up from an initial 1.5% estimate for the second quarter. LPL Financial chief economist Jeffrey Roach wrote that growth could reach 2.2% in the third quarter if trade drags less and businesses restock inventories, adding that demand-driven inflation and energy-supply shortages would pressure the Fed to raise rates on September 16. Troy Ludtka of SMBC Nikko Securities Americas noted the production index reached its highest level since November 2021. He separately said strong payroll growth in manufacturing and construction would let the Fed keep its hawkish tone.
Traders stay only mildly skeptical of a September move
The Federal Open Market Committee held its key rate in a range of 3.5%-3.75% last week. Traders put the odds of a hike at the Fed's September 15-16 meeting at 64.5%, down slightly from Friday, according to CME Group's FedWatch tool. Richard de Chazal, macro analyst at William Blair, wrote that companies keep complaining about pricing and that the report should tilt the scales further toward tightening policy at the September meeting.
Whether that pressure produces an actual rate hike remains open. Traders stayed only mildly skeptical of a move after Warsh's remarks last week, which many market participants viewed as ambiguous about the Fed's intentions.
Source: CNBC
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