US PMI Hits 58.4 as Input Costs Surge and Treasury Yields Jump

September's flash survey shows the fastest private-sector growth in five years and the steepest input-cost rise since 2022. Bond traders read it as a case for another Fed hike.

The clearest reaction to September's flash PMI came from the short end of the Treasury curve. By midday on September 23, the 2-year yield had risen about 16 basis points to 4.90%, according to Trading Economics, while the 10-year rose about 13 basis points to 5.10%, a level last seen in 2007. Traders put the odds of another quarter-point Fed increase in October at about 60%. When the 2-year moves more than the 10-year, the market is pricing policy, not just a risk premium on long bonds.

Stocks slipped less. By late morning in New York, the S&P 500 was down 0.7% at 7,708, the Dow 0.6% and the Nasdaq Composite 1.2%. Those moves are too small to count as a verdict on the survey, and uncertainty ahead of the Trump-Xi meeting also weighed on trading.

What the survey said

S&P Global's flash composite PMI rose to 58.4 from 56.0 in August, the highest since July 2021. Services rose to 58.7 and manufacturing to 57.0. New orders climbed to 58.2, the highest since March 2022. Backlogs of uncompleted work rose to their highest since May 2022, supplier delays were the most widespread since July 2022, and hiring ran at its fastest pace since 2022 even as firms reported growing difficulty finding staff. S&P Global said the survey was consistent with annualized GDP growth of about 5%.

Those are signs of demand running ahead of capacity. That supports nominal revenue but raises the cost of producing it, and the price gauges show how fast.

The spread that matters

The input-price index jumped to 66.4 from 59.9, its highest since October 2022. Firms blamed fuel and transport costs above all, and S&P Global said wage pressure had also picked up. In manufacturing, high raw-material prices were often linked to supply shortages, which is a capacity problem that a single rate hike does not fix. Selling-price inflation rose from August but, in S&P Global's words, stayed below the rates seen between March and July, because competition limited how much companies could pass on.

Input costs are now rising faster than at any time this year, while output prices rise more slowly than they did in the spring. The gap between the two, a rough gauge of pressure on unit margins, widened in September. The flash commentary gives the direction of the selling-price index but not its level, so the width of the gap will be clearer when final September data are published in early October.

A company whose costs rise faster than its prices either absorbs the difference in margin or risks volume by pushing through larger increases. September's survey says most firms are still absorbing. At an input-price reading of 66.4, that gets expensive quickly.

S&P Global sees a way out. It said the build-up of backlogs suggests companies are developing more pricing power. If selling prices catch up with costs in October and November, September's spike will read as a nominal-growth story, with higher revenue and inflation but stable margins, rather than a margin shock. Record diesel prices make the catch-up harder, because they feed straight into freight costs for goods companies.

Analysts have started trimming

Bottom-up forecasts moved the same way this week. According to Bloomberg, more analysts cut than raised US earnings estimates for the first time in 23 weeks on Citigroup's revisions index, ending the longest run of net upgrades since September 2021. BNP Paribas strategists quoted in the report said the cuts were concentrated in consumer staples, consumer discretionary, materials and financials, and pointed to higher living costs and energy prices. Analysts still expect a strong year for US earnings overall. One week of net cuts is a change in breadth, not an earnings recession.

The sector list fits the survey. Consumer companies sell to price-sensitive households while paying more for freight, packaging and labor. Materials producers are directly exposed to fuel and energy. Financials face a different channel, through funding costs and the shape of the yield curve.

Rates are doing the tightening

The Federal Reserve raised its target range by 25 basis points to 3.75%–4.00% at its September 15–16 meeting and flagged more to come. At 4.90%, the 2-year yield sits about 100 basis points above the midpoint of that range. That gap is the market's forecast of further hikes, not a term premium. The curve from 2 to 10 years is only about 20 basis points, so long rates are high mainly because short rates are expected to be high. For equities, that is the less forgiving combination. It raises the discount rate on future cash flows and the refinancing cost for leveraged companies just as margins come under pressure.

The next data can shift the odds. Jobless claims and new-home sales arrive on September 24, and durable-goods orders and revised consumer sentiment on September 25. Third-quarter earnings season in October will show whether gross margins compressed in the sectors where analysts have started cutting.

CTOL view: We expect the Federal Reserve to raise its target range by another 25 basis points, to 4.00%–4.25%, at its October 27–28 meeting, with the decision published on October 28. The market puts this at about 60%. We put it higher, because the survey combines a four-year high in input costs with the fastest hiring since 2022 and backlogs that signal pricing power ahead. The Fed's September statement said inflation remained elevated. This survey says it is still building. We are wrong if the Fed's October 28 statement leaves the target range at 3.75%–4.00% or lowers it.

US PMI Hits 58.4 as Input Costs Surge and Treasury Yields Jump

What the survey said

The spread that matters

Analysts have started trimming

Rates are doing the tightening

Sources

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