PMI Update Drives Likelihood of Jackson Hole Rate Cut Stance

The Flash August PMI report from S&P Global SPGI is out, and it showed that the U.S. economy accelerated in August with a rebound in job creation, but also a steep rise in input prices.

This added to the findings of last week’s July inflation data and it increases the likelihood that on Friday, during his Jackson Hole keynote, Fed Chair Powell will reiterate a measured pace when it comes to rate cuts, with the Fed remaining data dependent.

Ahead of the Flash August PMI data, other Fed officials were already making the case for something less than the multiple rate cuts the market baked into its thinking, per the CME FedWatch Tool.

On Thursday morning, Kansas City Fed President Jeffrey Schmid said there is no need to rush to cut interest rates, with inflation still above the central bank's 2% target and the labor market still in solid shape. Also, Atlanta Fed President Raphael Bostic reiterated his call for just one rate cut this year, adding the Fed should be able to bring rates to neutral sometime in 2026.

With the Flash August PMI data in hand, the odds of Powell offering some sobering comments about the path for monetary policy, should he opt to do so on Friday, are that much higher, and we’re seeing some of that realization in the market on Thursday.

Not only is the market trading off further, but rate cut probabilities depicted by the CME FedWatch Tool are also shifting lower. As of now, however, that tracker still shows the market expecting three 25-basis point rate cuts by the end of this year. We’ll want to circle back later on Thursday as the Flash August PMI data and its implications are more widely circulated. If the current picture remains, the more hawkish any comments made on Friday by Powell are, the greater the potential reaction in the market.

The August Flash PMI Report

The headline Flash S&P Global US PMI Composite Output Index rose to an eight-month high in August, edging up from 55.1 in July to 55.4. The S&P Global U.S. Manufacturing PMI rose from 49.8 in July to 53.3 in August, according to the flash reading, signaling a renewed improvement of factory business conditions, while the Flash Service PMI remained well in expansion territory with its 55.4 figure up from 54.2 in July.

We’d note the Flash August Manufacturing PMI reading was the highest since May 2022, but some of that reflects renewed inventory building. Per S&P:

"While stock building was partly fueled by expectations of rising demand, some factories also reported increased safety-stock building amid fears of supply shortages or to protect against further price rises, in turn reflecting the recent impact of import tariffs."

Now, let’s tackle the other two big items in the report:

Job creation: "Employment rose for a sixth successive month, with the pace of job creation hitting the highest since January (and one of the strongest rates seen for over three years). Service providers took on staff at the fastest pace for seven months, while factory job gains reached the highest since March 2022."

Prices: "Tariffs were reported as the key driver of further cost increases in August. Companies across both manufacturing and service sectors collectively reported the steepest rise in input prices since May and the second-largest increase since January 2023… Average prices charged for goods and services rose at the sharpest rate since August 2022 as firms passed higher costs on to customers."

Putting it all together, the pace of the economy, rebound in job creation and continued inflation pressure suggest the Fed need not rush to cut rates. We’ll want to verify this with the September PMI data from ISM that will be published after the upcoming Labor Day holiday weekend. But it’s enough on top of other recent data points to give the Fed Chair and the Federal Open Market Committee sufficient standing to maintain current monetary policy.

The Portfolio Game Plan

Earlier this week, we put some capital to work in the shares of ServiceNow NOW, SuRo Capital SSSS, Waste Management WM and Palantir PLTR, taking advantage of pullback and support levels. The sizes of those bites purposely left room for further actions should the market get a case of indigestion tomorrow after potential comments by the Fed chair.

After this week’s moves, we have roughly 11% of the Portfolio’s assets in cash, a nice bit of firepower that we can utilize to make some additional buys if the opportunity comes knocking.

In addition to those four positions, we are continuing to keep close tabs on the shares of Axon AXON. We’re also developing some new candidates, as well as we contemplate not only some new Portfolio signals, we’ll share on Saturday, but also as we think about the Portfolio over the coming 12-plus months.

More Pro Portfolio

At the time of publication, TheStreet Pro Portfolio was long NOW, SSSS, WM, PLTR and AXON.