The Philadelphia Fed business index for September stands at 23.2, exceeding the expected 2.5 and improving from -0.3 last month. Employment recorded a slight decrease to 5.6 from 5.9, while prices paid fell to 46.8, down from last month’s 66.8, which was at multi-year highs.
New orders saw an increase to 12.4 from -1.9 last month, and shipments rose to 26.1 from 4.5. Unfilled orders decreased to -6.6 from -16.8, and delivery time improved slightly to -3.4 from -5.4. Inventories increased to 15.0 from a previous -6.2, and the average workweek increased significantly to 14.9 from 4.7.
Six Month Outlook
Looking six months ahead, the index is at 31.5, up from last month’s 25.0. The capital expenditures index for six months forward decreased to 12.5 from 38.4. Compared to last month, new orders, prices paid, and employment showed varied projections.
Earlier this week, the Empire Fed manufacturing survey showed a decrease to -8.7 from an expected +5.0 and a previous +11.9. The special question within the Philly Fed report suggests an uptick in business activity.
Today’s Philly Fed manufacturing report was a significant upside surprise, showing strong expansion when only modest growth was expected. This stands in stark contrast to the weak Empire Fed survey from earlier this week, which showed contraction. We must consider this regional economic divergence as a source of market uncertainty.
The details within the report point to a healthy pickup in current business activity, with new orders and shipments surging after being negative last month. The jump in the average workweek also shows that firms are increasing output immediately. This suggests a potential re-acceleration in the industrial economy that was not priced into the market.
Inflation and Market Impact
Most importantly, the prices paid component fell sharply, showing inflationary pressures are easing significantly despite the surge in activity. This aligns with recent government data from last week, which showed the August Consumer Price Index (CPI) cooled to 2.9% year-over-year. This combination of strong growth and falling inflation is the ideal scenario for the Federal Reserve.
Given this data, we should anticipate that the market will reduce the odds of any further interest rate hikes this year. The Fed can afford to remain patient, a stance we recall the Chair emphasizing at Jackson Hole just last month. Derivative traders should consider positions that benefit from stable or falling interest rates, such as futures on the SOFR or Fed Funds rate.
However, a major warning sign is the collapse in the six-month forward capital expenditure index. While businesses are optimistic about the next six months overall, they are drastically pulling back on long-term investment plans. This suggests the current strength may not be sustainable deep into 2026.
The conflicting signals warrant a cautious but opportunistic approach in the coming weeks. We believe the best strategy is to express a bullish view with a defined time horizon, such as buying near-term call options on the S&P 500 or industrial sector ETFs for October and November expirations. We saw a similar divergence between regional Fed surveys back in late 2023, which led to a choppy but ultimately upward market in the following months.
