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MNI INTERVIEW: Services Growth Firm, But So Are Prices- ISM
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The U.S. services sector in showed resilience in activity and demand last month, even as costs remained elevated amid ongoing supply chain pressures and employment was subdued, Institute for Supply Management services chair Steve Miller told MNI Wednesday.
"Thirteen of the 18 industries are reporting an increase now," he said in an interview. "I think it's very broad. It's not specific to the World Cup."
The ISM services index edged up by 0.1pt to 54.1 in July, slightly below expectations for a larger increase. The composition of the report was mixed. The new orders and business activity components increased but there was a decline in the employment component that reversed its large increase in June.
"I think we're still at mid 50s throughout the year. It looks very solid. There's nothing I'm seeing that's saying there's slowdown," Miller said. For the last six months the PMI has been between 53.6 and 56.1.
EMPLOYMENT CONTRACTION
New orders were firm at 57.2 versus 55.1 previously, but the backlog of orders dropped to neutral and employment headed back into contraction territory at 47.4 from 51.2.
The 12-month employment index average stands at 48.7. "We're seeing sustained low or no growth from an employment perspective," Miller said.
Miller presented a cautious tone about the chance that increased new orders will lead to faster growth in coming months. "It depends on what happens with order backlog," he said. The new orders index has been in expansion above 50 for 14 consecutive months, the ISM report said.
"With new orders being so high, fifth highest in the last 26 months, if we see that flow through like we have in previous months to backlog, then I think we'll see a positive impact on the new hiring."
INFLATION PRESSURES
Inflation pressures remain elevated with prices paid up at 70.3, up from 67.7 in June. The index’s 12-month average reading climbed to 68.1 percent, its highest level since it was 69.9 percent in April 2023, ISM said. (See: MNI INTERVIEW: Fed Set To Hike Rates Once This Year-Haslag)
There were 23 commodities reported up in price, 6 reported down in price, and 8 reported in short supply in July.
"It's very clear that we're seeing the petroleum-related costs flowing through to prices paid," Miller said.
Aug-05 16:55
The Federal Reserve will likely raise interest rates once this year in September, in order to dampen inflation that is too elevated for comfort now but should begin to subside if oil prices stay low, former Dallas Fed economist Joseph Haslag told MNI.
“There’s going to be a hike. If the data stay on the trend they seem to be on now, I think there will be one 25 basis point hike before the end of the year,” Haslag said in an interview. “It will be in September but it will be the last one of the year.”
Haslag says inflation has been above target for too long and trended in the wrong direction this year, making policy overly loose against the backdrop of a strong economic performance.
“If I look at either the one-year or the two-year Treasury security, I would say the Fed's current stance is a little bit more expansionary than I wish it would be,” he said. “One hike sends both the right signal and it's about the right level for rates based on conditions that I can see right now.” (See MNI INTERVIEW: Fed To Consider Hike In Sept. - Lockhart)
The federal funds rate target needs to be lifted closer to the two-year Treasury rate in order for policy to be considered neutral, he added. “Then I think we've got a chance to to slide into the 2% (inflation goal). It may take some time, though. It may be in the middle of ‘27 before we get there.”
Haslag, now a professor at Auburn University, believes core inflation will hover between 3% and 3.5% for the remainder of the year, still far above the Fed’s 2% target but about 50 basis points below his own estimates from May, which had embedded worries of a more prolonged disruption of the Strait of Hormuz.
COMMUNICATIONS WOBBLE
The Fed held interest rates steady last week and longer-dated bond yields rose sharply as investors doubted the central bank’s commitment to bringing down inflation, in part because of what Haslag described as mixed messaging from the new chair.
“He's in a difficult situation. When you want to make something your own, sometimes you forget that you're really standing on the shoulders of giants,” said Haslag.
“He’s trying to do that balancing act because he keeps getting inflation. His words are kind of muddled and the market is already seeming to jump on every bit of volatility-inducing words that he chooses.”
Haslag said former chair Alan Greenspan, whom Warsh has held up as a model, used to do a great job of listening to his peers and crystalizing the committees views.
“Warsh is either going to do that, or there's a risk that he's going to lose control. He's not going to be the point person. He'll be the spokesperson, but I don't think he'll be the force that's driving the FOMC,” he said.
BALANCE SHEET
Similarly on the balance sheet, Haslag doesn’t think the chairman and other FOMC members pushing for a smaller footprint in financial markets has clearly articulated the rationale for it.
“Once you're in a world with abundant liquidity, I'm not sure that I understand that the size of the Fed’s balance sheet has significant consequences,” he said.
Aug-05 16:16
The Federal Reserve could raise interest rates by as much as 100 basis points in the next six months as inflation proves stubbornly elevated, Dean Croushore, a Philadelphia Fed visiting scholar and former staff economist at the Philadelphia Fed Bank told MNI.
"The outcome at the July meeting was expected, and the market reaction will help the Fed raise rates a bit at the next meeting and a few more meetings to come. Maybe a full percentage point over the next 6 months," Cruoshore said in an email.
Eventually the Fed will be able to lower rates again but that prospect is far off for now. At that point the FOMC could execute "a gradual reduction in rates as inflation comes down, which could be a while."
Croushore, now a professor at the University of Richmond, said he is a fan of Chairman Kevin Warsh's effort to revisit central bank communications -- namely by providing less of it. Bond markets reacted adversely to comments made during the July press conference, with longer-dated yields moving sharply higher.
"I like the new chair’s approach as I think shaking up the Fed system a bit will be beneficial, as well as thinking about different major structures," he said.
Cruoshore is also hopeful about the outcome of Warsh's five task forces, particularly the one focused on the balance sheet.
"I would hope they shrink the balance sheet and stop paying a set interest rate on all reserves," he said. (See MNI INTERVIEW: Fed To Consider Hike in Sept - Lockhart)
Aug-05 16:10
The European Central Bank remains on course to raise rates again in September despite the see-sawing uncertainty in the Strait of Hormuz, but the rate path further out is unclear despite most policymakers' understanding why markets are pricing a potential third hike, Eurosystem sources told MNI.
One national central bank official maintained there is no clear alternative to the widely-anticipated 25 basis-point hike to 2.50% at the Governing Council meeting on Sept 10.
"I can't see what pulls us back from a September hike -- it looks as clear a move as is likely to be seen. But it's a fair question to ask what comes after that. Certainly there is no clarity, with direction to be driven by the energy complex pricing and how it is flowing through into the real economy," the source said.
Another source attributed the lower-than-expected July flash inflation print to better-than-expected June data and a delayed pass-through from oil prices to the petrol pump. However, the source expected food inflation to rise in coming months given the long lags in the production chain.
Current conditions differ markedly from 2022, the source added, with firms not yet accelerating price hikes. The source noted that the September decision was still formerly subject to data developments and the wider economic situation, but trying to parse the situation beyond that point was impossible.
UNCERTAIN PATH
"Anything beyond September seems very speculative to me. Not long ago we were talking about delaying this second hike until December, and now it seems that won't be enough," another official said, adding that despite the absence of clear second-round effects or de-anchoring signals, the baseline would include an inevitable September move.
Also eyeing a September hike, another NCB source accepted that no second-round effects are evident, "but risks are building certainly and there is a strong argument that if we start to see second round effects, we are behind the curve."
Policymakers believe that anticipating the ECB’s path beyond September is very difficult as uncertainty around geopolitical developments, including in the Middle East, remain high.
Recent market pricing for a third 25 basis-point increase this year -- now somewhat pared back -- is seen as a logical step by some officials, although they stressed that understanding the dynamics of such pricing is not the same as accepting it would necessarily play out.
"Markets price what they think the rate will be ahead given their reading of our reaction function. As the last meeting shows, we even have differences over that on the Governing Council. [Market pricing] underpins our projections, but they aren't a signpost for us to follow," another Eurosystem source explained.
Another source understood the logic of markets pricing additional tightening, but also remarking it "does not necessarily have to happen."
The same official said a September hike could be the least risky option, but that did not mean "the same applies to a third hike in December or later," adding that relatively encouraging GDP growth makes it easier to move in September.
FLEXIBLE RESPONSE
Another source emphasised the ECB's readiness to change direction rapidly if the data warrant it, and focused on near-term projections and the actual data.
"I do think we should not focus on too distant a horizon in the forecast," the source continued. "In such a fast-changing world, the most useful information in the forecast is the part closest to its publication date. From there, we should move quickly and without being afraid to correct course if the situation changes rapidly."
The source explicitly framed such a willingness to reverse course as a reaction to events and not analytical error. "It would not be our analytical mistake. It would most likely be driven by geopolitics, and that should not tie our hands," the source added. "I think the market understands that and can position itself quickly accordingly."
An ECB spokesperson declined to comment.
U.S. manufacturing in July expanded at its fastest pace in over four years and firms are laying the foundation for even faster growth, Institute for Supply Management manufacturing chair Susan Spence told MNI.
"I am really excited about this report, and the thing we've been waiting for, to finally turn the corner, has happened, and that's employment. Great report overall," she said in an interview Monday.
The ISM manufacturing index rose 2.3ppts to 55.6 in July, beating market expectations. The headline measure jumped out of the narrow range of 52.4 and 54.0 that it has been in each of the first six months of the year, after almost all of the prior three years just below 50.
Spence said manufacturing growth will continue, and it is within the realm of possibility the PMI could accelerate to 60 this year.
HIRING EXPANSION
The report details point to a positive outlook for the manufacturing sector. The prices paid index eased to 71.1 from 73.0. The new orders index increased to 56.7 from 56.0. The production gauge surged by more than 6 points to 58.5, the highest reading since 2021.
The employment index jumped 3.1ppts to 52.8, the first time above 50 in 33 months. A reading above 50 indicated expansion, while being below indicates contraction. The ratio of ISM survey comments referencing hiring to those focused on managing head counts was 1.5 to 1, a reversal from the 1-to-2 ratio at the beginning of the year.
The ISM chair said manufacturing has been on a path to faster growth for some time, despite a number of headwinds.
"Six, seven, eight strong months in a row in the right direction and expansion in things like new orders, production, backlog" are what finally lifted the employment index into expansion, Spence said. "It has been what we've been waiting for. It's the first time in 33 months. That's a big deal."
"It feels to me, especially when you start to look at the sentiments which we get from the comments, that companies are finally comfortable enough, despite the war, despite tariffs, and now we have new tariffs, despite pricing, and now despite lead time challenges, they're feeling comfortable enough about order flow and backlog to start hiring."
The price gauge, however, is still above the 70 mark for the sixth straight month. There were 28 commodities reported up in price versus 3 reported down in price.
Continued price growth is one risk that could crimp new orders, Spence said, pointing to tariffs, but she remains optimistic that inflation will cool. "If we have pricing creeping back down to 60, then I think we're going to be on fire, and I think you're going to see employment continuing to expand."
SIGH OF RELIEF
"Demand sentiment is also pretty good." Spence expressed optimism about demand and the new orders index. "I think it will hold. I could see it going to 60."
The Chicago Business Barometer™, produced with MNI, edged up 0.9 points to 57.6 in July. The Barometer remained in expansionary territory for a third consecutive month.
The modest increase was driven by stronger New Orders, largely offset by weaker Supplier Deliveries, Order Backlogs, Employment and Production.
NEW ORDERS REBOUND STRONGLY, JUST BELOW MAY HIGH
New Orders rebounded 11.6 points, consistent with the level seen in May, which was the highest since January 2022.
SUPPLIER DELIVERIES SHORTEN, BUST PERSISTENT ELECTRONICS DELAYS
Supplier Deliveries pulled back 9.5 points, more than unwinding June’s strong rise. However, some respondents noted persistent delays, particularly for electronic components.
Order Backlogs retreated 5.2 points, reentering contraction after two months above the neutral 50 mark – though remaining above April’s low.
Employment declined 3.8 points, holding in contraction territory for a fifth consecutive month and reaching its lowest level since March.
Inventories increased 7.9 points, returning to expansion and reaching their highest level since March 2023.
PRICES PAID STABILIZE BUT STILL ELEVATED
Prices Paid were essentially unchanged, easing 0.1 point. Respondents continue to cite geopolitical factors and elevated energy costs as pricing pressures, although some respondents reported improving price stability.
The survey ran from July 1 to July 15.
Jul-31 13:45
Bank of Japan Governor Kazuo Ueda pointed to a possible rate hike in September after the BOJ kept policy unchanged as expected on Friday, saying that upside risks to prices were becoming more salient as underlying inflation approaches the 2% target.
“Given that underlying CPI inflation has been approaching 2% target and financial conditions remained accommodative, the BOJ will raise the policy rate to adjust the degree of easy policy in a timely manner,” the governor told a news conference after the eight-to-one decision, with only Hajime Takata calling for an immediate 25-basis-point increase in the policy rate to 1.25%. The BOJ last hiked in June.
Ueda told reporters that the BOJ will carefully monitor developments in forex markets, as well as crude oil prices and AI-related demand, before its next policy meeting. But he declined to comment directly on dramatic moves in the yen following a reported intervention late on Thursday Japanese time, which saw the currency strengthen to around JPY157 from JPY162.8 in only 50 minutes before it settled closer to 160. (See MNI INTERVIEW: Ex-BOJ's Kameda- Sept Or Oct Hike If Yen 165)
Ueda also declined to comment on the scale of the upside risk to prices, but said that while these risks were less relevant when underlying CPI inflation was far below 2%, this is no longer the case and they cannot be ignored.
EXPECTATIONS RISE
Ueda warned that medium- to long-term inflation expectations are rising considerably, adding that these are strongly linked to underlying CPI inflation.
“If [the BOJ] judged that financial conditions are too accommodative, the BOJ would accelerate the pace of raising the policy interest rate, though it takes some time for policy decisions affect economic activity and financial conditions,” Ueda said.
The BOJ needs to ascertain whether underlying inflation becomes anchored at a level around the 2% target, the BOJ said in its Outlook Report. Ueda noted that the BOJ looks at various datapoints to assess underlying inflation, which does not always move in line with headline inflation.
The Outlook Report maintained its anticipated timing for hitting the 2% target, saying that underlying CPI inflation is expected to increase gradually, and to reach a level generally consistent with price stability between the second half of fiscal 2026 and fiscal 2027 and to remain at around that level thereafter.
The BOJ raised the board’s median forecast for growth in gross domestic product this fiscal year to 0.6% from April’s 0.5% but lowered its core inflation forecast to 2.5% from 2.8% despite upside risks to prices. The core-core CPI forecast this fiscal year was revised to 2.5% from April’s 2.6%.
Jul-31 09:26
The Bank of England held rates at 3.75% for the fifth consecutive meeting on Thursday, with persistent divisions over the likelihood of second-round effects despite a narrowing in the vote split to six-three.
The Policy Summary noted that "CPI inflation has fallen to 2.6% since the previous meeting, faster than the Bank had expected, although it is expected to rise later this year as the effects of higher energy prices continue to pass through," while Governor Andrew Bailey emphasised the continued uncertainty of the outlook at the press conference. (see MNI BOE WATCH: Hold Seen As Central Projection In Spotlight)
"There have continued to be clear signs of underlying disinflation in recent data," the statement said, adding that "loose labour market conditions, and higher interest rates faced by households and businesses than prior to the conflict, will also act to reduce inflation over time."
The Monetary Policy Report reintroduced a central scenario, which had been omitted from April’s edition, but BOE staff noted that it did not reflect agreement among the committee of the likeliest path forward, but was rather one that all members could agree to as a likely baseline. That baseline sees inflation averaging 3.0% this year, 2.7% in 2027 and 1.8% - below the 2% target - in 2028.
Late on Thursday, financial markets continue to price a 25-basis-point hike by year end, with another in Q1 2027.
SECOND-ROUND EFFECTS
The Monetary Policy Report dedicated two boxes to the question of second-round effects, concluding that "although it is reassuring to some extent that early indicators of second-round effects are not signalling material effects, the overall assessment is necessarily tentative as second-round effects often emerge with a lag."
This lag was highlighted by the minority voting for a hike, with previous dissenters Huw Pill and Megan Greene now joined by Catherine Mann who said she changed her vote because of "the collapse of the U.S.-Iran Memorandum of Understanding."
The three believed a proactive hike would insure against second-round effects, referencing "research [finding] that setting policy as if there were stronger second-round effects and course correcting if needed, would prove to be less costly than vice versa." (See MNI INTERVIEW: UK Consumer Enjoys July 'Burnham Bounce' - GfK)
This argument did not convince the other six members. Bailey said he believed the "jury is out" on the strength of second-round effects, but "we should take something from the fact that we've seen weaker pass through in recent times."
Deputy Governor Clare Lombardelli said her vote to hold "wasn't a close judgement," with her individual paragraph asserting that policy is restrictive and "provides sensible risk management given the inflationary impulse from higher energy prices."
Deputy Governor Sarah Breeden said she would "continue to focus on how second-round effects are likely to evolve," but "it remains early days", while Deputy Governor Ramsden saw two-way rate risk dependent on developments. Swati Dhingra said that a hike "would be disproportionate as, unlike 2022, the starting point for this shock is much softer and the policy stance is more restrictive." Fellow dove Alan Taylor said his most likely outcome sits between the baseline and milder scenario, giving the Bank scope to hold policy now before resuming cuts at a later date.
QUANTITATIVE TIGHTENING
The global outlook could yet change further before the Bank announces its next monetary policy decision on Sept 17, when it will also make its next decision over the future pace of quantitative tightening. The MPR included a box claiming that 20-30 basis points of the increase in 10-year gilt yields since 2022 have resulted from the policy.
"Given the overall increase in the term premium for 10-year gilt yields since February 2022, this suggests QT has driven between a tenth and a sixth of the total," it said, concluding that "QT auctions have had little impact on market functioning."
At the press conference, Ramsden called this "a very small fraction ... entirely consistent with our principles that Bank Rate is our primary tool [for monetary policy]."
Bailey refused to be drawn on the QT decision, though he noted that market conditions always form an important part of the MPC’s judgement on the matter. (See MNI INTERVIEW: Gilt Spikes Make Case To Slow QT - NIESR Head)
Jul-30 15:09
China's pork prices, a key component of the country's consumer price index, are expected to recover gradually from the multi-year lows seen in the first half as supply contracts and holiday demand improves, a leading industry expert told MNI, suggesting pork's drag on headline inflation should ease in the second half.
"Prices are expected to see a moderate recovery in the second half of the year," said Zhu Zengyong, chief pork industry analyst at the Chinese Academy of Agricultural Sciences, noting ample supply and weak end-user demand will limit the scope for any sharp increase. The proportion of loss-making producers is expected to decline in the fourth quarter, Zhu said, with live hog prices potentially reaching the sector's average production cost of about CNY13 per kilogram, broadly the break-even level and up from the CNY10.5/kg recorded at the end of July.
Based on MNI calculations using Mysteel data, the expected recovery would imply a narrower year-on-year decline in hog prices in the second half of this year than H1, when prices averaged about CNY2.5-5.0/kg below levels a year earlier. Mysteel data showed average prices of CNY13.7/kg in Q3 and CNY11.5/kg in Q4 2025.
Zhu’s assessment is based on the continued reduction in breeding sow capacity, which should gradually reduce the number of hogs brought to market in the second half.
Demand is also expected to improve as processors and retailers build inventories ahead of the Mid-Autumn Festival and National Day holidays. The fourth quarter is traditionally the peak season for meat consumption, supporting a moderate rise in pork prices, Zhu said. However, he cautioned that the recovery will remain constrained by elevated frozen pork inventories accumulated during the first half. As these stocks are released into the market in Q4, they are likely to weigh on prices and limit further upside.
China’s Consumer Price Index increased by 1.0% y/y in June, with pork prices down -15.9% y/y in the month and -13.4% during H1, data from the National Bureau of Statistics showed. Zhu earlier this year anticipated pork prices would bottom out mid-year. (See MNI INTERVIEW: China's Pork Prices To Slow Q1, Recover In Q3)
LOW PRICES
The prolonged market downturn in the first half pushed live hog prices to an eight-year low of CNY8.66/kg in mid-April.
Zhu attributed the extended period of weak prices to rapid gains in production efficiency, falling costs and greater industry resilience as China's pork sector became increasingly industrialised and consolidated. Large producers retain significant financing and cost advantages, enabling them to maintain output despite weak prices, he said.
At the same time, productivity per sow, commonly measured by pigs per sow per year, has improved significantly. As a result, the same breeding sow inventory can produce more market-ready hogs, increasing effective supply even as farms reduce nominal breeding capacity.
On the demand side, structural changes have continued to weigh on pork consumption, Zhu said. China's shrinking and ageing population, together with the growing popularity of healthier diets, has contributed to a steady decline in per-capita pork consumption. Poultry, beef and mutton have also become increasingly important substitutes, further limiting demand growth.
Consumer prices are likely to continue increasing gradually and could peak at around 1.6% in Q3, economists recently told MNI. (See MNI EM: China's Producer Prices To Peak In Q3, Widening CPI Gap)
Jul-30 06:10
The Reserve Bank of Australia Board is likely to leave the cash rate unchanged at 4.35% in August following lower-than-expected underlying inflation in the second quarter, though a lack of guidance is making it difficult for markets to gauge policymakers' appetite for further tightening, former RBA chief economist John Simon told MNI.
"In light of today's CPI, I can't see them moving off the back of that," said Simon, who headed the RBA's economic research department from 2014 to 2024. "But if you look at the tradables and non-tradables split, non-tradable inflation is still poking up."
CPI rose 0.6% q/q in Q2, below the 0.7% consensus and slowing from 1.4% in Q1, while the trimmed mean increased 0.8% q/q, also below expectations and unchanged from the previous quarter.
Simon argued persistent domestic inflation pressures mean monetary policy is not yet sufficiently restrictive, reiterating his stance that the cash rate will likely need to rise to 4.60% by late 2026 or early 2027. (See MNI INTERVIEW: Former RBA Research Chief Warns Of Higher Rates) "Services is poking up. The domestic factors that have been the problem in Australia, just obscured by the international noise, remain and don't seem to be going away," he said. "I don't think [the RBA] is firmly on top of inflation."
He noted that June's 4.4% unemployment rate remains below the RBA's estimate of the non-accelerating inflation rate of unemployment, indicating capacity pressures persist despite monthly volatility in employment.
"When I look at wages and services inflation, it's all a consistent picture of excess domestic demand," he continued.
COMMUNICATION GAP
Simon said markets have progressively priced out the prospect of another rate increase, but attributed much of the volatility in expectations to a lack of guidance from the RBA rather than a material shift in the inflation outlook.
"My guess would be we'll probably see it sometime next year rather than at the end of this year, simply because they move slowly," he said. "I still think monetary policy has some work to do."
Markets see little chance of a rate hike at the Aug 11 meeting and have steadily pared expectations for an additional increase this year.
Simon acknowledged that his own forecasts have often anticipated tightening too early, but maintained that current policy is only marginally restrictive and should eventually require another increase if domestic inflation fails to ease further.
Simon said the RBA's new governance structure has reduced, rather than improved, transparency following the central bank review. "The review was meant to produce more discussion about the risks and strategy," he said. "Instead, we've got less information than we had before ... We don't actually have the information to understand what they're thinking."
Governor Michele Bullock's address this week was simple and failed to cover fresh ground, he added. "Yes, supply shocks make it difficult, but you need to tell us what's your strategy for dealing with them, rather than saying it's difficult," he noted. "And that's a gap in all their communication. That it's basically 'trust us.' Monetary policy doesn't work like that, particularly with a track record like the RBA’s."
Jul-30 02:15About
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