October PMI Highlights Steady Economic Expansion, with Inflation Cooling Off
The October S&P Global PMI data highlights a promising start for the fourth quarter in the US economy, showcasing growth in business activity even as inflationary pressures ease. The Composite PMI, which aggregates the manufacturing and services sectors, edged up to 54.3 from September’s 54.0, with a reading above 50 indicating expansion. Services led the upswing, with the sector’s PMI hitting 55.3, while manufacturing saw a slight improvement but remained in contraction territory with a reading of 47.8.
The PMI (Purchasing Managers Index) offers insights that often precede government economic reports, giving markets and policymakers a near real-time look at business sentiment. October’s report bolstered optimism in the service sector, which showed sustained demand despite inflationary concerns. This data suggests that inflation may be easing in critical areas like goods and services prices. With businesses reporting the slowest price increases in nearly four-and-a-half years, economists are cautiously optimistic that inflation will continue to ease as businesses respond to consumer demand for lower-cost alternatives.
Solid October PMI highlights economic resilience despite manufacturing slump
The October PMI data underscores a complex economic landscape in the US, where service sector growth remains robust even as manufacturing continues to struggle. October’s PMI data saw the services sector maintaining momentum, reaching 55.3 from 55.2 in September. However, manufacturing lags behind, with its PMI rising only slightly to 47.8, still below 50 and marking a third consecutive month of contraction.
Manufacturing’s challenges stem from ongoing supply chain issues, shifting global demand, and cautious business investment. According to Chris Williamson, chief business economist at S&P Global Market Intelligence, the manufacturing slump reflects both economic caution ahead of the US presidential election and persistent labor market constraints. Nevertheless, the resilience of the services sector is carrying the economy forward, helping to offset manufacturing’s drag and keeping overall business activity on an upward trajectory as the US heads deeper into the fourth quarter.
Inflation moderation and consumer demand impacting business pricing strategies
One of the standout metrics in October’s PMI report is the moderation of price increases across the US economy, suggesting that inflation may be softening. According to S&P Global, the survey’s measure of average prices charged by businesses for goods and services declined to 51.6, the lowest level since May 2020. This decrease highlights a notable shift from recent years when businesses grappled with sharp price increases due to supply chain disruptions and strong consumer demand. The decline in pricing pressures comes as companies respond to inflation-weary consumers who are increasingly opting for budget-friendly alternatives.
The Federal Reserve’s recent ‘Beige Book’ report confirmed that many consumers are pushing back against rising prices by choosing less expensive products. This shift in consumer behavior has prompted businesses to reduce price increases or hold prices steady. Not only does this shift reflect changing consumer sentiment, but it also supports the possibility that inflation may ease toward the Federal Reserve’s long-term target of 2%. Economists view this as a promising sign for the coming months, with the potential to stabilize purchasing power and stimulate demand through year-end.
Impact of price easing on Fed’s monetary policy strategy
The recent PMI data aligns with a growing consensus that the Federal Reserve may maintain a cautious approach in its interest rate policy. As price pressures show signs of easing, the Fed may see less need for aggressive rate cuts, instead taking a more measured approach. The central bank previously enacted a large half-percentage-point cut to its policy rate, now within the 4.75% to 5.00% range, in response to inflationary pressures. However, with input costs for businesses and prices charged to consumers both falling, the Fed’s rate cuts are beginning to take effect, potentially reducing the pace of future adjustments.
Continued price stability could allow the Fed to focus on sustained growth without risking heightened inflation. Market experts expect further rate reductions of 25 basis points in November and December, based on the assumption that inflation remains under control. If business activity continues to grow without significant increases in input costs, the Fed may be able to balance its dual mandate of promoting maximum employment and maintaining stable prices more effectively. October’s PMI report not only signals economic resilience but also supports the Fed’s gradual approach to monetary policy adjustments.
The PMI effect on currency and market sentiments ahead of US elections
The October PMI report has spurred reactions across financial markets, with a moderate uptick in the US dollar following the news. The dollar’s slight gain reflects investor optimism in the US economy’s resilience, driven primarily by the steady services sector. However, the currency’s performance remains mixed against major global rivals, with the EUR/USD pair hovering below the 1.0800 mark. Given the eurozone’s weaker economic data, the euro faces continued downward pressure, allowing the dollar to maintain its position as a haven asset amid uncertainty surrounding the US presidential election.
Financial analysts are closely watching how the election cycle will influence market behavior. Elections historically bring volatility to financial markets, and the dollar often benefits from a preference for stable assets when uncertainty rises. The S&P Global report underscores a strong baseline for economic activity that could bolster investor confidence heading into the election period. On the technical side, Valeria Bednarik, FXStreet’s chief analyst, notes that the EUR/USD pair remains in a downward trend, with resistance levels near 1.0840. Breaking below immediate support around 1.0750 could prompt further euro losses as the pair approaches the year’s low near 1.0600.
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