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MNI INTERVIEW: ISM Chief Says Risks Tilted To The Downside
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U.S. manufacturing expanded again in September but risks are tiled to the downside as price pressures mount, Institute for Supply Management manufacturing chair Susan Spence told MNI Thursday.
"I'm tending to be more concerned, even though we're in expansion, because we have a war, we have trade wars, and we seem to have no end to the threats," she said in an interview.
Spence continues to be worried that the PMI could drop closer to 50. The headline measure in September ticked down to 54.5 from 54.6 in August, versus market forecasts for 55.0. The ISM production index eased 1.6 percentage points to 56.7.
Despite growth, ISM survey respondents are worried about further shocks, she said. "The survey takers are looking around and wondering what's next? What tariff war is next? And this Iran war was supposed to be very brief."
Asked about the balance of risks, Spence said: "I think to the downside."
"The roller coaster especially around tariffs has taught us some lessons last year, which is that your numbers could be good but that can kind of change on a dime. Sometimes the increases in new orders are because people are trying to get ahead of tariffs."
"I want to see this expansion really take off, like high 50s and 60s, but you've got these worrisome factors going on," Spence said, citing continued policy uncertainty and shocks.
PRICES SURGE
The prices paid measure increased by 6.8 to 77.9, its highest level since May. Many respondents continued to flag price and supply chain pressures. Almost 60% of manufacturing respondents indicated they were experiencing higher prices, a jump from 46.2 in the prior month's reading. Only 2.8% were experiencing lower prices.
There were 24 commodities reported up in price versus none reported lower, and 11 commodities reported in short supply, highlighted by metals and tech-related items. (See: MNI POLICY: Fed In No Hurry But Committed To Taming Inflation)
"There are more commodities up since the start of the war, and so I'm worried it will choke it off. That's kind of my conclusion," Spence said.
The new orders index increased 1.6 percentage points to 55.3, employment was up 1.5 points to 52.7, inventories were down 2.0 to 48.6, and backlog of orders increased 4.6 points to 56.4.
General sentiment was worse than last month, amid some demand softening, Spence said. "It feels like there's a stutter step there that eventually will hit production and backlog."
Oct-01 17:30
Kevin Warsh is putting his mark on the Federal Reserve as he lays the groundwork for regime change at the central bank, though the most profound shifts are months away and unlikely to shape the current course of monetary policy.
Some easy-fix changes are underway that move things in the direction Warsh seeks while the Fed focuses on restoring price stability and continuing to shorten its Treasury portfolio to achieve a more market-neutral composition.
Most immediately, the chairman is providing less guidance on the policy outlook: he trimmed the post-meeting statement and press conference and is refraining from submitting quarterly economic projections.
At his suggestion, the FOMC is also discussing how to reduce the number of meetings in which it votes on policy to make room for meetings dedicated to reevaluating central bank strategy. No official decision has been made.
LONGER-RUN
A foundational reassessment of the inflation framework and the optimal policy implementation framework, based on recommendations from two external task forces, will be thoroughly debated next year, and any changes would be implemented only once inflation is back near target and the Fed's portfolio contains a larger share of Treasury bills. (See MNI POLICY: Fed In No Hurry But Committed To Taming Inflation)
For now, Warsh, a longtime critic of the Fed's large balance sheet, has reaffirmed the ample reserves framework and promised a rigorous debate ahead of any change. An acceleration of duration reduction by shifting maturing coupon reinvestments into shorter-dated tenors would have little market impact, according to BofA Securities analysts.
Before resuming reserve management purchases, the FOMC last year said it favored a portfolio composition that more closely matches that of Treasury securities outstanding over the long run. The weighted average duration of the Fed's portfolio has exceeded total outstanding issuance since 2008.
Warsh's three other task forces -- on communications, data sources, and productivity and jobs -- are also charged with preparing the Fed for the next policy cycle. The data and productivity task forces include private sector experts looking at improving the quality and timeliness of real economic signals and assessing how AI is likely to affect productivity, employment and growth.
Each of the five task forces is assisted by one board staffer and one regional bank staffer, who play supporting roles and do not make suggestions on the findings.
"Their recommendations will come later and have no bearing on decisions we make in the current policy conjuncture. But I believe that for future policy challenges, this intellectual investment today will leave us far better prepared," Warsh said in Jackson Hole.
EXCITEMENT AND TREPIDATION
Among FOMC members and Fed staffers, the task forces have been met with a mix of excitement and trepidation. Some officials welcome Warsh's fresh thinking and push for change, particularly in areas like communication and the balance sheet where there was already some consensus on the need for improvement.
"All those things are time-driven, and so I think there's space and time, but we have to really emerge from those discussions to get more information … and try to figure out what our next actions are as an FOMC," Kansas City Fed President Jeff Schmid told Yahoo News on the sidelines of the Jackson Hole conference.
Some policymakers like Governor Chris Waller have publicly worried about whether the task forces are trying to reinvent the wheel, covering ground already trodden by Fed researchers over many years. Some staffers are also feeling left out: if their area of research is covered by the task force, they worry about what's happening outside their control; if it's not, they worry their expertise is no longer a key focus for the central bank. (See MNI POLICY: Warsh Task Forces Will Need To Woo FOMC Skeptics)
Oct-01 15:00
Promotion of the global use of the yuan should not be used as an argument for rushing through an opening of China’s capital account before institutional conditions mature, a prominent economist told MNI in an interview in which he also called for measures to boost imports and reduce the country’s trade surplus.
An overly-hasty capital account opening would jeopardise financial stability and end up being counter-productive for yuan internationalisation anyway, warned Yu Yongding, senior fellow at the Chinese Academy of Social Sciences, pointing to lessons from the 1998 Asian Financial Crisis.
While internationalisation of China’s currency can play an important role in safeguarding the nation’s financial security and building a financial powerhouse, this process should follow market principles and not be forced, said Yu, a former member of the People’s Bank of China’s monetary policy committee. (See MNI INTERVIEW: Chinese Industry Solid Enough For Stronger Yuan)
He added that the use of dollar payments systems as a weapon by the U.S. presents an opportunity for China and the yuan, though one that also bring new challenges. Non-resident demand for yuan assets is counter-cyclical, Yu noted, so abandoning capital controls would increase the difficulty for the central bank to carry out monetary policy as well as adding to financial stability risks.
The 1998 Asian Financial Crisis offers several lessons for China, according to the economist. Full convertibility of the Thai baht and its growing use in places like Malaysia and Singapore made it easy for speculators to short the currency, because of baht liquidity easily available beyond the jurisdiction of Thai authorities. In contrast, while the Hong Kong dollar was fully convertible, there were no significant pools of the currency outside the territory, so the Hong Kong Monetary Authority was able to stave off short-sellers by tightening liquidity, sending interbank lending rates soaring to 300% and making it unprofitable to borrow HKD.
Since 2016, China's approach to yuan internationalisation has shifted away from moving towards full convertibility of the currency towards a pipeline-style opening of the capital account, via schemes such as Bond Connect, Stock Connect, and Swap Connect.
Within this framework of a gradual and controlled opening of capital flows, China has been able to advance yuan use in areas such as pricing, settlement and international reserves, whilst limiting the potential for dangerous arbitrage, noted Yu.
TRADE SURPLUS
Another risk for China comes from its trade surpluses, whose growth over the past two years has come as shortfalls in domestic demand have forced companies to rely heavily on exports, Yu said. (See MNI INTERVIEW: China To Boost Imports To Balance Trade)
The swelling trade surplus has had geopolitical consequences, and has also added to China’s exposure to U.S. dollar assets, which now total over USD1 trillion, at a time when risks are rising from a deteriorating U.S. fiscal position and a bubble in AI stocks.
According to Yu, China needs to take measures to expand import demand and stabilise exports to achieve balanced foreign trade over time. It might even be able to tolerate some periods of trade deficit, which would enable it to spend its dollar IOUs on tangible resources required for domestic growth.
This means that the government should implement its Dual Circulation strategy and phase out export-oriented policies such as tax rebates and subsidies, Yu said.
Oct-01 09:45
China needs to seize the opportunity offered by low inflation to increase central government bond issuance and ease monetary policy, in order to boost demand by supporting infrastructure and public investment, a prominent economist told MNI.
“We have had opportunities for many years, but I do not know whether opportunities will continue to wait for us,” said Yu Yongding, senior fellow at the Chinese Academy of Social Sciences. “In my view, the intensity of expansionary fiscal and monetary policy is insufficient, and China’s economic growth rate can be higher than the current 5%.”
Yu pointed to potential for investment in the "Six Infrastructure Networks" including the national water grid, power grid, data centres, telecommunications, urban underground pipelines, and logistics network -- all in line with China’s latest 15th five-year plan.
“China’s infrastructure investment is far from saturated,” said Yu, a former member of the monetary policy committee of the People’s Bank of China.
Addressing concerns over low financial returns on infrastructure investments, he argued that the value of public investment cannot be measured solely by commercial returns, and due weight must also be given to its social and long-term benefits, as well as its significance for national security and strategic development.
On Tuesday, the PBOC cut its one-year Pledged Supplementary Lending rate by 25 basis points to 1.5% and expanded its scope to cover the six networks. Created in 2014 as a targeted policy tool, PSL provides re-lending facilities to the three policy banks to support investment in key areas. (See MNI INTERVIEW2: China Needs Monetary Easing To Boost Growth）
OPPORTUNITIES
If China’s inflation were higher it would make it more difficult to deploy stimulus, Yu noted, particularly at a time of rising oil prices, higher global inflation and U.S. 10-year Treasury yields near 5%, with the Federal Reserve potentially raising rates further. The country has a window of opportunity to act, he said.
Since 2024, China’s policy advisors have tended to agree that the country’s main economic problem is a shortfall in demand, but views remain divided as to whether bridging this demand gap requires prioritising consumption stimulus or scaling up infrastructure investment. The majority have advocated for stimulating consumption and not investment.
Yu insists that the core policy focus must remain on investment. Short-term fiscal stimulus can temporarily boost consumption, but it cannot alter long-term consumption trends, he said, adding that consumption is a function of income, income expectations, and wealth.
China's central debt-to-GDP ratio, low treasury yields, and subdued inflation indicate that the central government still has ample headroom for expanding leverage, Yu said. (See MNI: China To Deepen Fiscal-Monetary Coordination, Eye Credit)
The primary risk surrounding Chinese public debt lies in local government liabilities, which account for a uniquely high proportion of the country’s total public debt, he noted, adding that he agreed with calls for local government bonds to be swapped for central government debt.
Oct-01 09:45
You are invited to listen to a Livestreamed MNI Connect Video Conference with ECB Executive Board Member, Piero Cipollone.
Details below:
- Speaker: ECB Executive Board Member,Piero Cipollone.
- Topic of discussion: ‘Money in the Digital Age: Digital Euro, Tokenisation and the Role of Central Banks’
- Date: Tuesday 6 October from 1400-15.30 London/0900-10.30 ET/15:00-16:30 CET
- This event will be run as a Zoom Webinar and is a public, on-the-record event.
To register please go to: MNI Webcast Registration
Bank of Japan officials are increasingly likely to wait until December for their next policy rate increase, after Tankan’s September’s survey provided little justification for a hike at this month’s meeting, MNI understands.
The Tankan showed that companies saw annual consumer inflation at 2.6% in September, down from 2.7% in June. They saw inflation at 2.6% three years ahead and 2.5% five years ahead, compared with 2.6% and 2.6% in June. Moves towards 3% would have been likely to prompt an October hike, MNI understands.
December’s Tankan will be released before the Dec 17-18 meeting, and BOJ officials will scrutinise it for further inflation signals, while also monitoring developments in currency markets.. (See MNI INTERVIEW: Ex-BOJ Sakurai Sees Dec Hike, 2% Terminal Rate)
SUMMARY OF OPINIONS
The summary of opinions from the BOJ’s Sept 17-18 meeting, at which the policy rate was increased to 1.25% from 1%, did not emphasise any imminent need for a follow-up move, though some board members saw the need for further tightening in a timely manner to anchor underlying CPI inflation at around 2%.
One member said that “If signs of an upward deviation in prices are observed, the Bank will need to accelerate the pace of rate hikes.” Another member said that it is important to keep in mind the estimated range of the neutral interest rate, but that “the Bank should continue to act in a timely manner without becoming overly cautious.” Another said “It is desirable for the Bank to bring the policy interest rate closer to the approximate goal relatively soon.”
September’s Tankan, with 70 responses gathered by Sept 9, showed that while bank lending rates rose from three months ago, reflecting the BOJ’s 25-basis-point hike to 1% in June, the impact of higher borrowing costs on capital investment plans, corporate financing and fund availability was limited.
The benchmark diffusion index for sentiment among major manufacturers rose to +24 in September from +22 in June on the back of AI-related demand and price pass-through of higher costs.
Oct-01 07:16
Higher long-term rates pose a risk to the stability of the eurozone’s financial system, former European Central Bank executive board member Lorenzo Bini Smaghi told MNI, adding that ECB’s ongoing quantitative tightening is “like throwing gasoline onto the fire.”
Bini Smaghi noted that the supply of both government and private sector bonds is rising, as the AI investment boom coincides with fiscal deficits, pushing longer-term rates higher.
“The priority for the central bank is to avoid expectations of monetisation of debt, which would raise inflation expectations. But there is also a risk that that higher long-term rates undermine the stability of the financial system,” he said in an interview, adding that there is no reason to justify continuing the reduction of the ECB’s balance sheet, which has seen its liquidity pool fall to EUR2.1 trillion from a peak of EUR4.7 trillion as it allows bonds and loans to expire at maturity.
“There is no rationale for taking liquidity outside the system and continuing to reduce the central bank’s balance sheet. It is only ideological and only contributes to upward pressure on long term rates, which is not desirable,” Bini Smaghi said.
But the former executive board member, who stepped down as chair of Societe Generale earlier this year, played down comparisons between the current rise in yields and the European sovereign debt crisis of 2011-12.
NO REPEAT OF EUROZONE CRISIS
“The situation has nothing in common with 2011-12. The ECB has new tools and the whole European fiscal framework has been reshaped,” he said, though he acknowledged that uncertainty over France’s fiscal situation, particularly ahead of next year’s elections, could potentially pose a risk of contagion to countries such as Italy, Spain and Belgium.
“It’s the uncertainty about what would happen after the elections, and whether the fiscal situation will be fixed, which leads market participants to hedge,” he said.
Bini Smaghi considers it more likely than not that the ECB will hold rates at its next meeting in October, but sees a new normal in which inflation and rates will be higher. (See MNI SOURCES: ECB Likely To Wait Till December Before Next Hike)
“The ECB’s challenge is to not give the impression that raising rates is a pattern and that now it is beginning a new tightening cycle,” he said.
However, with inflation now at around 3%, current ECB rates remain quite low, he said, adding that policymakers need to avoid allowing any excessive accommodation that could fuel further inflationary pressures, even if this means raising rates to levels which trigger an economic slowdown and then force a monetary policy about-face.
The appearance of AI may also mean that some social sectors do relatively less well, increasing challenges for policymakers, he said, adding that ECB Governing Council members will need to maintain verbal discipline and avoid fuelling market volatility in a context of considerable uncertainty.
Sep-30 14:40
The Chicago Business Barometer™, rebounded 11.7 points to 58.8 in September. The Barometer is back in expansionary territory after one month below the neutral 50 mark and is now at its highest since May.
The rise was driven by increases in Production, New Orders, Supplier Deliveries and Order Backlogs. A decline in Employment provided some offset.
PRODUCTION RETURNS TO HIGHEST SINCE MAY
Production expanded 15.5 points to the highest level since May, returning to expansionary territory following one month in contraction.
New Orders advanced 13.3 points, a partial unwind of the prior decline. Some respondents attributed this to a seasonal improvement in orders.
SUPPLIER DELIVERIES SEE TWENTIETH MONTH OF EXPANSION
Supplier Deliveries extended 9.6 points, marking a twentieth month above 50. No respondents reported faster delivery times compared to last month. Some highlighted constraints in availability and delivery of electronic components and other commodities.
Order Backlogs rose 8.4 points but remained in contraction for a third consecutive month.
Employment softened 4.3 points, back to contraction after one month in expansionary territory. The share reporting higher employment fell, while reports of workforce reduction edged up, with some citing outsourcing.
PRICES PAID EASE BUT UPWARD PRESSURE REMAINS
Prices Paid eased 3.7 points, now back around the level seen in July. The distribution of responses continues to indicate upward price pressure, as no respondents reported lower prices paid for the seventh consecutive month, while the share reporting increases moderated.
Inventories eased 0.6 points.
The survey ran from September 1 to September 15.
Sep-30 13:45
You are invited to listen to a livestreamed MNI Connect Video Conference with the Congressional Budget Office's, Phillip Swagel.
Details below:
- Speaker: Phillip Swagel, Director of the Congressional Budget Office.
- Topic of discussion: ‘The U.S. Budget and Economic Outlook’
- Date: Thursday, 22nd October 2026, 10 am to 11:30 am ET / 3 pm to 4:30 pm London time.
- This event will be run as a Zoom Webinar and is a public, on-the-record event.
To register please go to: MNI Webcast Registration
Chinese interbank liquidity is expected to remain ample thanks to increased injections by the People's Bank of China and persistently weak credit demand, with expectations for a rate cut this year diminishing further but the Federal Reserve's hawkish shift unlikely to alter the PBOC's accommodative stance, MNI’s September China Money Market Index showed on Wednesday.
The liquidity outlook sub-index fell to 42.5 from August’s 45.3 (the higher it reads, the tighter liquidity), below the 50-mark threshold for a third consecutive month, with no traders foreseeing liquidity tightening. The sub-index covering September liquidity conditions edged up to 41.5 from 35.8, as only 17.0% of traders reported looser conditions than last month, the lowest in three months.
Traders said the central bank’s stance on maintaining ample liquidity remains clear, as it offsets cash demand ahead of the seven-day National Day holiday from Oct 1.
The central bank has increased daily open market operations to satisfy demand for overnight reverse repos due to cash withdrawals, month-end bank regulatory assessments, and open market operation maturities, guiding the short-term money market rate, DR001, to run around the policy rate in a range of 1.35% to 1.4%, a Shanghai trader said.
The Bank announced it would conduct overnight reverse repurchase agreements from Sept 28 to Oct 8, with daily volumes capped at CNY1 trillion to match short-term liquidity needs, the highest daily cap since it added the overnight tenor to its liquidity management tools in June. It also added a net CNY200 billion via its medium-term lending facility this month, the third consecutive month of net injections.
The ample liquidity stance remains unchanged, and the impact of short-term factors such as tax payment, government bond issuance, and maturities of liquidity instruments is expected to ease, an Anhui trader noted. Liquidity remains balanced, and the central bank's supportive stance is explicit, a Jiangsu trader added.
OPEN MARKET OPERATIONS
The sub-index for the PBOC’s OMO outlook rose slightly to 46.2 from 45.3, as 17.0% of traders saw “net injections,” compared with 18.9% last month, and 73.6% thought operations would preserve the current comfortable liquidity environment. The sub-index covering the PBOC’s current OMOs rose to 50.0, with all participants assessing OMOs as being “in line with demand”. (See MNI INTERVIEW2: China Needs Monetary Easing To Boost Growth)
The outright reverse repo operations over the coming month outlook sub index rose to 48.1 from 43.4, as 13.2% of traders expected the PBOC would to operations, from 22.6% last month.
Comfortable liquidity conditions were also attributed to weak credit demand. A special question this month showed 35.8% of respondents believed weak demand had led to surplus funds, while 39.6% said ample liquidity was also due to PBOC injections.
The Shanghai trader told MNI that the slow recovery in medium- to long-term household and corporate loans has boosted excess reserves. The central bank’s accommodative stance and fiscal spending have loosened liquidity, a Fujian trader.
FED HIKES
Another special question indicated that Fed rate hikes are unlikely to affect the PBOC’s stance. 52.8% of traders said the PBOC still prioritises the domestic economy as priority, though 9.4% thought the external environment will have an impact, with widening interest rate spreads and a possible risk of capital outflows. (See MNI PBOC WATCH: Wider China-U.S. Yield Gap No Bar To Easing)
While the yield spread between 10-year Chinese and U.S. government bonds is at historic highs, factors including yuan appreciation, the resilience of Chinese exports and stable foreign-exchange settlement by exporters will offset capital outflow pressures, a Jiangsu trader said.
Expectations for a policy rate cut dropped further this month. The PBOC’s seven-day reverse repo rate outlook sub-index edged down to 50 from last month’s 52.8, with all participants expecting a steady policy rate in the coming month. 7.5% of traders see the seven-day repo rate for deposit-taking institutions (DR007) rising next month from 5.7%, with the sub-index falling to 50.9 from 51.9. DR007 is benchmarked by the PBOC’s key seven-day reverse repo rate.
The next-six-month policy outlook sub-index printed at 35.8 from 37.7, with 28.3% of traders seeing additional easing moves, up from August’s 24.5%. The sub-index for current policy bias rose to 45.3 from 43.4, with 9.4% seeing an easier stance, the lowest since September 2024.
The MNI China Money Market Index (MMI) survey was conducted from September 14 to September 24, with participation of 53 traders from both state-owned and joint-venture banks.
The full press report can be seen here:
MNI China Liquidity Index Sept Presser 2026.pdf
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