The Dallas Fed's October survey put its raw-materials price index at 55.3, about twice its long-run average, while new orders fell to 9.3 from 30.7. Two days before the Fed decides, prediction markets nudged up the odds of a hike.
Two days before the Federal Reserve's decision, a regional factory survey delivered both halves of the central bank's problem in the same table.
The Dallas Fed's Texas Manufacturing Outlook Survey for October showed the index of raw-materials prices that manufacturers pay rising to 55.3 from 52.2. Its average over the life of the survey is 28.1, so the current reading is roughly double the norm. The index of prices manufacturers charge for finished goods rose to 29.9 from 27.6, more than three times its 9.3 average.
At the same time, demand cooled sharply. The new-orders index fell to 9.3 from 30.7, shipments to 8.4 from 24.8, and production to 15.8 from 29.5. All three remain positive, meaning more firms reported increases than decreases, but the pace slowed abruptly.
Fuel in the comments
The survey's respondents pointed to energy. "Fuel pricing and the cost of domestic product increasing are dramatically tempering a recovery in the freight market," one transportation-equipment manufacturer wrote.
That fits the backdrop. Brent crude settled at $116.72 on Friday, its highest close since late April, and costs that start at the fuel pump move through freight, packaging and materials before they reach factory price lists. The finished-goods index suggests some of that cost is being passed on.
Other parts of the survey were less hot. The wages and benefits index eased to 20.8 from 27.4 and employment to 11.6 from 15.1. Manufacturers grew more optimistic about the future, with the six-month outlook for general business activity rising to 38.1 from 20.8.
The survey collected responses from Oct. 13 to 21, and 64 of the 114 firms contacted responded. It covers one state's factories and is not a national measure.
A better national read than expected
Separately, the Chicago Fed National Activity Index for September came in at 0.07, against a forecast of minus 0.1 and an August reading of minus 0.08. A reading above zero indicates growth slightly above trend.
What markets are pricing
The Fed is expected to hold rates on Wednesday, after raising them in September. Money markets put the chance of a quarter-point increase this week at about 10%.
Prediction markets moved a little toward that outcome during the session. On Polymarket, the contract on no change in rates fell to 91.65 cents at 1:46 p.m. from 95.5 cents at 6 a.m. On Kalshi, the contract on a quarter-point increase rose to 9 cents from 6 cents, on about 675,000 contracts traded, more than 286,000 of them in the 1 p.m. hour. No Fed communication explains the move. The two-year auction results arrived at 1 p.m., though the two-year yield barely moved on them, and the trading may reflect hedging ahead of the meeting.
Monday's two-year Treasury auction drew a high yield of 4.708%. Foreign and other indirect bidders took 45.7% of the $69 billion sale, below their recent average of about 58%, while direct bidders took a larger-than-usual 41.3%. One auction does not make a trend, and the $70 billion five-year sale on Tuesday will offer a second read.
Two readings
One reading is that the price pressure is broadening. Input costs are running at about twice their norm, factories are passing more of them on, and the national activity index beat expectations. That supports the case for the further increase that prediction markets and many economists expect in December.
The other is that the survey describes a cost shock, not an overheating economy. New orders and shipments fell by more than 15 points each, wage pressure eased, and the inflation is coming from oil. Higher rates would do little about fuel prices and more about the demand that is already slowing.
What to watch
The Conference Board's consumer confidence report and the five-year auction on Tuesday, the Fed's statement and press conference on Wednesday, and third-quarter GDP and September's personal consumption expenditures price index on Thursday.