VIDEO: Flash PMI Supports Fed’s Dovish Outlook

In today’s Pro Portfolio video, Chris Versace discusses one of his favorite economic reports: the Flash September PMI. The report out this morning from S&P Global gives clues about the pace of the economy, as well as employment growth and inflation, says Versace.

Versace says the report supports the more dovish tilt by the Fed as the impact of slower growth weighs on hiring. Tariff pressure calls into question company margins and prospects for the second half of 2025, he says, and the Pro Portfolio sees this as supporting more market-friendly comments from Fed officials as they make their rounds this week and next. All this could lead the market to melt up further into overbought territory.

More Pro Portfolio:

At the time of publication, TheStreet Pro Portfolio had no positions in any security mentioned.

Transcript

CHRIS VERSACE: Hey, everyone. Chris Versace here, Tuesday, September 23. And as we talked about in yesterday's video, and even in Friday's weekly roundup, today is a big day in terms of economic data and the comments that we'll get subsequent to that for Fed Chair Powell. Let's break it down.

The big economic data point that we're talking about today, it's one of our favorites, so to speak, in that it contains a lot of helpful information. I'm talking about the flash PMI report from S&P Global. And today, we have the one from September. Remember, this brings us some big insight on the manufacturing and services economy on the headline front, but it also digs into what's going on in terms of new orders, employment, and yes, inflation. And as we know, employment and inflation are key items to watch as we think about the forward path for Fed monetary policy.

So what did this report have to say? Well, headline composite PMI for the month of September-- again, flash-- came in a little weaker than expected with sequential declines both in manufacturing and services. And when we step back a little bit, we see that this is another month where the headline composite figure that blends both manufacturing and services together fell. So July was a rather robust figure, we can say, north of 55. But August was slower than that and September slower than that.

But what's really key about this report is the innards of what it has to say. And I just want to break this down with you, just really from the report. So when we look at it, it says that the services economy, yes, continues to be the main driving force behind the positive growth that we saw in the report. Remember, a figure over 50 indicates an expanding economy. And in the case of the composite PMI number 4, September was 53.6, down from 54.6 the month before. So still expanding, just at a slower rate.

When we look at what happened on the new order front, though, inflows of new orders for services showed the smallest rise for the three-months period as weaker domestic demand growth offset the first rise in exports since March. So we're seeing signs that the economy continues to slow-- again, growing, but at a slower rate.

What happened on the employment front? This is important because we know that the Fed is dueling right now with concerns over the employment market as well as continued inflation pressures. So on the employment front, employment rose for a seventh straight month in September. Positive, though the rate of job growth slowed. Lower job gains were seen across both manufacturing and service sectors.

This is going to speak to one of the reasons why the Fed had telegraphed one additional rate cut in 2025. Again, we talked about it, how recent weaker employment data through the August employment report, tied with those big revisions for the 12 months ending in March, likely led the Fed to frontload some rate cuts.

Now, on the pricing front, this is important as well. Tariffs once again overwhelmingly cited as the principal cause of further cost increases in September, especially in the manufacturing sector. Per the report, the manufacturing input price inflation remained elevated at one of the highest rates since the pandemic. This is in the month of September.

Service sector inflation hit the second highest recorded level over the last 27 months. So clearly, companies are feeling the brunt of tariffs and higher input costs. But the question is, can they pass those higher prices along to customers? And this is what we're seeing. That is not appearing to happen. Firms across both manufacturing and services often reported difficulties passing higher costs on to customers due to weak demand and growing competition.

So as we think about this, especially as we approach the September quarter earnings season and updated expectations for the final quarter of the year, companies are restocking inventories at higher levels, but they're not able to pass on higher price increases or as much as they could have several months ago. What does this tell us? It tells us that margins are going to be a key item to watch, especially in the manufacturing economy, as companies report their September quarter results and update their outlook for the balance of the year.

Is this report going to be helpful for the Fed, and is the market likely to read into it as supporting multiple rate cuts in the balance of this year? I would say that yes, the comments about weakening employment, slower growth, and the fact that inflation pressures appear to be cooling, at least on the output side or consumer- or customer-facing front, I think this is going to support that. We'll have to see what Fed Chair Powell says later today if he addresses this report.

Remember, Powell does not typically provide updated guidance for monetary policy in between meetings. But we'll also want to hear what some other Fed officials have to say. And there were a couple out earlier today with them indicating that the employment market is increasingly the point of focus. We could hear Powell say that today, but again, we want to be careful in dissecting his words so that we understand what he is trying to say, not what we want him to say.

That's always been a big issue in my view. Whether it comes to data or comments from the Fed chair, we have to be careful to interpret what is being said, not reading into what we want it to. So with that, we're going to have a lot more coming your way. We will have the chart of the day. We will have some more comments building on the multiple price increases that Wall Street gave the portfolio's holdings today.

If you missed that alert, there were multiple price target increases for United Rentals, Palantir, Welltower even. And we also talked about some positive comments that indirectly benefit our position in Universal Display. I think you want to check that out. And again, stay tuned, folks. We got a lot more coming your way.