The S&P Global US Manufacturing PMI for August 2025 was 53.3, surpassing the estimated 49.5, while the Services PMI recorded 55.4, exceeding the expected 54.2. The Composite PMI index increased to 55.4 from 55.1 in July, marking an eight-month high, with output and demand growing for 31 consecutive months.

Manufacturing output experienced the largest monthly increase since May 2022, while new orders reached their highest since February 2024. The data aligns with an economy growing at a 2.5% annualised rate, compared to 1.3% in the first half of 2025. Rising demand created significant work backlogs, and finished goods stockpiling increased at a record pace.

Rising Input Prices

Tariffs led to input prices rising at the steepest rate since May 2023, with the second-largest surge since January 2023. Inflation pressures reached a three-year high, suggesting the consumer price index might rise further above the Federal Reserve’s 2% target. Employment growth continued for six months, the fastest since January 2025. Rising backlogs drove manufacturing and services hiring to the highest levels since March 2022 and May 2022, respectively.

Business confidence improved to a two-month high, though remains below early 2025 levels. The growth outlook for Q3 is a strong 2.5% annualised pace, while inflation risks remain with persistent tariff-related pressures, supporting the potential for higher yields and a firmer USD.

The August PMI report significantly changes our outlook for the coming weeks. With the manufacturing index jumping to 53.3 against a 49.5 estimate, the data points to a much stronger economy than we previously anticipated. This directly challenges the market’s expectation for a Federal Reserve rate cut in September, which is still priced with a 79% probability.

Given this, we should reconsider our interest rate positions. The 2-year Treasury yield, which settled around 4.4% last week, is highly sensitive to Fed policy and is likely to move sharply higher on this news. We should look at selling short-term interest rate futures, such as those for the Secured Overnight Financing Rate (SOFR), to position for the market repricing a more hawkish Fed.

Good News Is Bad News Scenario

For equity traders, this “good news is bad news” scenario will likely increase market volatility. Stronger economic growth supports earnings, but the prospect of higher interest rates for longer will pressure valuations, a dynamic we saw repeatedly in 2023. We should prepare for choppiness in the S&P 500 by considering options strategies like straddles or buying calls on the VIX index, which is currently trading near a low of 13.

The US dollar stands to benefit significantly from this divergence. With the US economy accelerating to a 2.5% annualized pace while recent data from the ECB continues to show sluggish growth in Europe, the case for a stronger dollar is clear. We should favor long positions on the dollar, potentially through call options on the U.S. Dollar Index (DXY) or against currencies like the euro.

Finally, the report’s emphasis on rising input costs and the fastest increase in selling prices since August 2022 suggests inflation is re-accelerating. The mention of tariffs as a key driver and record-high stockpiling of finished goods points to persistent price pressures. This environment could favor options on inflation-linked bond ETFs or certain industrial commodities that benefit from both strong manufacturing and inflationary tailwinds.

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