Insights 
VT 
US manufacturing data from S&P Global reveals that the final PMI for August is 53.0, slightly lower than the initial estimate of 53.3. This marks an improvement from the previous month’s reading of 49.8, reaching a three-year high. Input cost inflation rose, ranking as the second-highest increase in three years.
The ISM manufacturing survey and construction spending figures are due soon. The past three months have seen the strongest production expansion since early 2022, driven by rising sales. Factories hired more staff in August due to new orders and incomplete work.
Factors Affecting US Economy
The sector is expected to benefit the US economy in the third quarter, partly due to inventory building. Factories reported increased warehouse holdings in August over concerns about future price rises and supply constraints. This situation is exacerbated by tariff impacts, leading to further input price increases. Factories are passing these cost increases on to customers, raising factory gate prices. The impact of these price rises on consumer inflation in the coming months remains uncertain.
The August manufacturing report confirms the economy was running hot over the summer, marking a significant turnaround from the contraction we saw in July. This strength, the best we’ve seen since the first half of 2022, initially points toward continued upside for equities. However, the more critical detail for us is the sharp acceleration in input costs, driven by tariffs.
This factory-level inflation is the key concern, as it directly challenges the Federal Reserve’s current policy stance. With the latest core CPI reading still hovering at a stubborn 3.1%, any sign that it could be pushed higher will increase the probability of a rate hike before the year ends. We are therefore considering positions in interest rate derivatives that would benefit from the Fed being forced to tighten policy again.
Market Outlook
This conflict between strong growth and rising inflation creates uncertainty, which we believe is not fully priced into the market. With the VIX volatility index having recently traded below 15, options are relatively cheap. This makes it an opportune time to buy protection or structure trades, like straddles on the SPX, that profit from a significant market move in either direction.
We are also noting that this manufacturing boom is partly driven by companies building up inventory to get ahead of price increases. This is a pattern we saw during the supply chain chaos of 2021-2022, which was followed by a sharp downturn once warehouses were full and demand cooled. This suggests that while industrial sector stocks may see a short-term benefit, we should be cautious about their performance heading into 2026.
