Insights 
VT 
The New York Fed’s manufacturing index for August increased to 11.90 from the prior month’s 5.500, exceeding the estimated 0.00. This rise marks the highest level since November 2024. The general business conditions index saw a six-point increase, reaching 11.9. The new orders index improved by 13 points to 15.4, reflecting strong growth in orders, while the shipments index remained steady at 12.2.
Meanwhile, the inventories index decreased by 22 points to -6.4, suggesting a decline in stock levels. The employment index rose slightly to 4.4, indicating marginal job growth, with the average workweek stabilising around zero. Delivery times lengthened as supply availability worsened, contributing to these dynamics.
Price Changes
Regarding prices, the index for prices paid remained high at 54.1, indicating persisting input cost increases, whereas prices received decreased to 22.9, showing moderate growth in selling prices. Although the future outlook index dropped 8 points to 16.0, optimism about future conditions remains. Expectations for new orders and shipments are optimistic, but two-thirds of firms anticipate further input price increases in the next six months. Capital spending plans appear subdued.
The August manufacturing report came in much stronger than anyone expected, which is the big surprise for us today. This unexpected strength, combined with very high input prices, gives the Federal Reserve more room to keep interest rates elevated. We should therefore anticipate that market bets on near-term rate cuts will be pushed further out, likely into early 2026.
This situation feels similar to the inflation battles of 2023 and 2024, where strong economic data consistently led to a sell-off in government bonds, pushing yields higher. Current data from the CME FedWatch tool will almost certainly reflect this, pricing in a lower chance of a rate cut before year-end than it did last week. This suggests that options strategies that profit from rising yields on 2-year and 10-year Treasury notes could be favorable.
Impact on Stock and Bond Markets
For stock markets, the strong new orders are a good sign for industrial company revenues this quarter. However, the threat of higher interest rates for a longer period tends to hold back stock valuations, creating a difficult environment. This conflict could increase market choppiness, making strategies that benefit from a rise in volatility, like buying call options on the VIX index, more attractive.
We must also pay close attention to the details showing longer delivery times and falling inventories. These are classic signs of supply chain stress, which we saw disrupt corporate earnings badly back in 2022. This could squeeze profit margins again, as companies are paying more for materials but getting less for their finished goods.
The drop in the future business outlook and soft plans for capital spending are also a warning. It tells us that while companies are busy filling orders now, they are hesitant to invest in future growth. This might support a pair trade, such as being long on commodities sensitive to current demand while being cautious on industrial stocks that depend on future investment.
