S&P Global's October flash survey showed selling prices for goods and services rising at the steepest rate since August 2022, even as activity cooled slightly. Factory hiring was the strongest since 2012, and traders nudged up the odds of a rate increase.
American businesses are passing higher costs on to customers faster than at any point in more than four years, according to survey data released Friday, one of the last major readings on the economy before the Federal Reserve's Oct. 27-28 meeting.
S&P Global's flash U.S. composite purchasing managers' index slipped to 57.6 in October from 58.4, a two-month low. That still marked the second-sharpest increase in activity since March 2022, the survey's compiler said. The services index eased to 57.9 from 58.8, a touch below the 58.0 economists had expected. The manufacturing PMI edged up to 56.0 from 55.9, ahead of forecasts of 55.5 and the strongest improvement in factory operating conditions since May 2022.
The price gauges are the story
The headline numbers say the economy is still growing quickly. The price questions say something more pointed.
The overall rise in prices charged across goods and services was the largest since August 2022. Services output prices rose at the steepest rate since then, and manufacturers' selling prices increased at the fastest pace since July 2022. Input costs climbed at the quickest rate since November 2022, with only September's reading higher in that span.
S&P Global tied part of the cost pressure to "the renewed surge in oil prices" and to supply bottlenecks. Its economists said the output readings were "consistent with GDP growing at a 5% annualized rate," and that the pace of selling-price increases "indicates consumer price inflation is likely to rise further above the Fed's target in the coming months."
Hiring picked up as well. Employment grew at the fastest pace since June 2022 outside of September, and factory payrolls rose at the quickest rate since March 2012.
Not the picture of a slowdown
That combination sits awkwardly with the way bonds traded on Thursday, when the 10-year Treasury yield had its largest one-day drop since March 2023 amid a selloff in technology stocks. A growth scare would show up as weakening activity and softening prices. October's survey shows activity running hot and prices accelerating.
Bonds gave back part of that rally on Friday. By early afternoon, the two-year yield was up about 5 basis points at 4.69% and the 10-year up about 3 basis points at 4.99%. Yields were already higher before the 9:45 a.m. release, and oil rose through the morning, so the survey was one of several forces at work rather than the only one.
What traders are pricing
Rate-setters are in their pre-meeting blackout, so the market is the only voice. On Polymarket, the contract that pays if the Fed holds rates in October slipped to 91.5 cents from 93.5 cents. On Kalshi, the contract on a quarter-point increase rose to about 8 cents from 6 cents. Both moves began before the data, and a hold remains the overwhelming expectation. For December, Polymarket priced about a 72.5% chance of a quarter-point increase. The Fed's target range is 3.75% to 4.00%.
Broadening or a fuel bill
One reading is that price pressure is spreading. Selling prices are rising across both goods and services, firms are hiring aggressively, and companies are finding that customers will accept higher prices. On that view, Thursday's bond rally was not a signal that the Fed can relax.
The other reading is that this is an energy shock working its way through costs. S&P Global itself pointed to oil, the composite index did ease, and households are far gloomier than businesses (see the next article). A price spike driven by fuel and met by weakening consumer demand could argue for patience rather than more tightening.
What to watch
The Fed's decision at 2 p.m. Eastern on Oct. 28, then the advance estimate of third-quarter GDP and September's personal consumption expenditures price index at 8:30 a.m. on Oct. 29. Final October PMI readings follow on Nov. 2 for manufacturing and Nov. 4 for services.