MANUFACTURING PMIs

Eurozone: Factory output growth accelerates to four-and-a-half-year high in August

The S&P Global Eurozone Manufacturing PMI increased to 52.7 in August, from 51.9 in July, its highest level since May 2022.

A considerable contribution to this uplift stemmed from the eurozone’s largest economy, Germany, which recorded its best month of manufacturing sector growth in over four years. France also helped lift the overall expansion rate, although this was somewhat offset by a renewed decline in Italy’s goods-producing economy (the first since January). Spain was the only other monitored eurozone country to register a Manufacturing PMI figure in contraction territory, as solid upturns were seen elsewhere.

Manufacturing production growth accelerated across the eurozone for a third successive month in August, marking a sustained uplift in momentum. The rate of expansion was above its survey average and the fastest in four-and-a-half years. Data split by the three main industrial categories revealed that the intermediate goods segment provided the greatest boost to output.

This includes critical industries such as chemicals and metals, as well as electrical equipment and electronic components, suggesting the euro area can also be a beneficiary from the tech supercycle, even if it’s arriving late to the party.

Demand conditions were supportive of growth, as evidenced by a solid rise in the level of incoming new orders. The increase in total sales volumes was the sharpest seen since early-2022. Notably, new export business grew for just the second time in four-and-a-half years. Overseas sales growth was particularly strong in Austria, Germany and the Netherlands.

After slight cutbacks in June and July, eurozone goods producers raised their purchasing activity during the latest survey period. Stocks of purchases continued to fall, however, and at an accelerated rate. August PMI data pointed to ongoing supply-side disruption as average delivery times from vendors lengthened sharply and to a slightly greater extent than in July.

Regarding eurozone manufacturers’ own capacity constraints, the latest survey results showed no such signs as backlogged order volumes were unchanged on the month. Factory employment levels were held broadly steady, which in itself was a relative improvement after more than three years of uninterrupted decline.

The downward path of input price inflation continued in August. Input costs rose at the softest rate in six months, although the rate of increase was still well above that seen before the outbreak of the Middle East war. This also held true for output charges.

That said, the pace of disinflation is starting to level off and the PMI’s price metrics remain well above their pre-war levels, which may just embolden a cautious stance by eurozone monetary policymakers.

Finally, business confidence strengthened again in August, signalling a fourth successive monthly rise in eurozone manufacturers’ growth expectations for the coming 12 months. In fact, the overall level of optimism was above its long-term average.

China: Business conditions in manufacturing improve atstronger rate in August

The headline seasonally adjusted RatingDog China General Manufacturing Purchasing Managers’ Index™ (PMI) posted above the 50.0 no-change mark for the ninth month running in August, indicating an improvement in manufacturing conditions. The current upturn is the longest in five years. The PMI rose to a two-month high of 51.5 from July’s 50.9, and had positive contributions from four components, the exception being employment which was neutral.

New orders placed with Chinese manufacturers rose for the fifteenth consecutive month in August, the longest period of growth since 2018. Firms linked rising orders to improved market conditions, stronger client demand, new clients, export growth and business development. The rate of expansion accelerated since July and was greater than the long-run series average, aided by the fastest rise in new export business in six months.

Stronger pipelines of new work led to a faster increase in Chinese manufacturing production in August. Output has risen for nine consecutive months, and the latest expansion was the strongest since May.

Stronger growth of new orders led to a further increase in the level of outstanding work. Backlogs rose for the seventh month running, and at the fastest rate since March. Meanwhile, stronger output growth led to inventories of finished goods expanding the most since September 2025.

Although new orders and backlogs rose in August, manufacturers held employment steady following increases in June and July. Consumer goods manufacturers continued to raise their staffing levels, but this was offset by lower workforces in the intermediate goods and investment goods sectors.

Firmer demand conditions led Chinese manufacturers to order more inputs in August, having previously cut purchasing in July. This contributed to a build-up of input stocks of purchases for the ninth month running, the longest sequence since 2006-07. Despite rising demand for inputs, suppliers’ delivery times were little-changed compared with July.

August survey data signalled a rise in cost pressures at manufacturers. The rate of input price inflation accelerated for the first time since April, but remained relatively modest. Higher costs reflected rising raw material prices, especially metals and oil, supplier adjustments, market volatility and stronger demand.

Although input prices rose further in August, Chinese manufacturers reduced their output prices for the first time in 2026 so far. This was linked to strong market competition and promotions, though the overall reduction was only marginal.

The 12-month outlook for production in the Chinese manufacturing sector remained positive in August. Optimistic forecasts were linked to rising market and client demand, new product launches, business development, improved macroeconomic conditions, expanded production capacity, technical upgrades and new client acquisitions. That said, the overall degree of confidence was the softest since January.

Japan: New business increases at fastest rate since January 2018

The headline S&P Global Japan Manufacturing Purchasing Managers’ Index™ (PMI) climbed from 54.5 in July to 54.9 in August, signalling an improvement in the health of the sector for the eighth month in a row. Furthermore, the rate of increase was the strongest recorded since April and the second-steepest since January 2022.

Stronger growth in new orders was the principal driver of the improvement in the headline reading. Notably, the amount of new business received by Japanese manufacturing firms increased at the sharpest rate in over eight-and-a-half years.

Panellists reported that sales had been supported by firmer demand conditions, new client enquiries and robust sales for products such as semiconductors and AI-related products.

New export business likewise rose at an accelerated pace that was the quickest since the start of 2018, with firms noting greater demand across North America, Southeast Asia and China in particular.

Goods producers in Japan responded to higher intakes of new work by raising their production levels again in August. Furthermore, the rate of expansion eased only slightly since July and was the second-quickest since February 2014.

Employment across Japan’s manufacturing industry also remained on an upward trajectory as firms looked to expand their operating capacity. Furthermore, the rate of job creation was the fastest seen since February 2018 and solid. Although payrolls rose further, outstanding business continued to increase midway through the third quarter. Notably, the rate of accumulation held close to July’s multi-year record.

Higher output requirements led to a sustained increase in purchasing activity, which rose to the greatest extent since April 2022. However, supply chains remained under notable pressure, partly due to disruption stemming from the war in the Middle East, but also product shortages. As a result, the time taken for inputs to be delivered continued to lengthen at one of the fastest rates seen over the past four years.

Longer lead times limited the rate of inventory growth, with stocks of purchased items rising at a slower and only marginal pace. Meanwhile, stocks of finished goods continued to fall slightly.

The rate of input price inflation across Japan’s manufacturing industry remained historically sharp in August. That said, the latest upturn in costs was the slowest seen since March. Operating expenses increased due to a combination of higher raw material and oil prices, in part driven by the conflict in the Middle East, as well as a weak yen exchange rate, according to panellists. As a result, factories continued to raise their selling prices sharply.

Japanese manufacturing firms were generally optimistic that output will continue to increase over the next year in August. Moreover, the degree of positive sentiment was the highest recorded in six months and above the historical trend. Companies often projected further increases in customer demand, particularly for semiconductors and AI-related technology.

We get the North American PMIs later today but it is clear that

• the AI boom is global
• supply conditions are worsening with rising risks of shortages in critical inputs
• costs continue to be driven by disruptions linked to wars and supplier bottlenecks around the Strait of Hormuz
• output prices keep rising strongly, except in China in spite of strong input inflation

Import prices have sharply accelerated in 2026. IT product prices are obviously exploding but rising commodity prices are also increasingly impacting goods inflation.

(The Daily Shot)

Trump says US will refill Strategic Petroleum Reserve using Venezuelan oil

Trump said ⁠in a social media post that the “topping ​out” process will begin shortly, describing the Venezuelan ​oil as a “Gift from Venezuela to the People of the United States.”

Well, don’t hold your breadth on this other Trumpism.

Utilizing Venezuelan crude to replenish the depleted SPR faces major physical, logistical, and geopolitical barriers.

• One, the SPR is designed to store light sweet and medium sour crudes. Venezuelan oil is extra-heavy crude (p.5-12 API) and bitumen (like oil sands). This thick, tar-like oil fails the minimum API gravity requirements for the SPR.
• Two, Venezuelan crude is highly “sour,” containing high levels of sulfur (4-5%) and heavy metals. Injecting it directly into underground salt caverns can damage the infrastructure and degrade long-term storage viability.

The WaPo:

Even if the opaque, controversial agreement announced Friday night triggers a surge of investment in oil production, industry insiders and analysts say substantial amounts of new crude would not flow out of Venezuela for years.

That much was evident in the shrug with which oil traders responded to the deal. Prices didn’t come down at all over the weekend. They went up. (…)

“Everyone cheering the Venezuela deal thinks a flood of cheap oil is about to hit and pull gas prices down. It isn’t,” Tracy Shuchart, senior economist at futures trading platform NinjaTrader, posted on X.

“The barrels that could actually move a U.S. pump price are 5 to 15 years out,” she wrote.

Meanwhile, from National Bank Financial:

“Perhaps more important is the trend in refined petroleum products, such as gasoline and diesel. Refining margins have surged as global refining capacity has tightened, partly reflecting Ukrainian attacks on Russian refineries. Thus, even if traffic through the Strait of Hormuz was to eventually normalize, and if crude prices were to ease, the resulting lower crude oil prices may not translate fully into lower prices at the pump or broader energy costs. That matters because the global economy does not run on crude oil itself, but on the refined products derived from it.”

EARNINGS WATCH

Corporate America’s Profits Are Booming—and Signal More Good Times Ahead

Profits are booming at America’s biggest companies—and their leaders say that likely won’t change soon. (…)

S&P 500 earnings rose the most since fall 2021. Quarterly sales also climbed more than they have in years. By a nearly 2-to-1 margin, more companies raised their profit guidance for the current quarter than lowered it—a turnaround from a year ago, when more were lowering their outlooks. (…)

So far, there are few signs that the factors driving growth will wane in the near future, said Torsten Slok, chief economist of Apollo Global Management.

“As long as the AI boom continues and the stock market continues to be elevated, and we continue to have strong consumer income growth, the consumer will continue to be in good shape,” he said. But if the promise of AI fails to justify the massive investment, “we will be having a different conversation.”

The FT:

Pre-tax earnings hit an annualised $4.8tn in the second quarter, or 18% of national income, according to Bureau of Economic Analysis data, the highest share since the aftermath of the second world war.

Employees’ share from wages and benefits fell to 60%, the lowest level since the 1950s. “Regardless of what measure you look at, workers, in terms of employee compensation, have been receiving an increasingly small share of national income over time,” said Abiel Reinhart, an economist at JPMorgan.

The decline in labour’s share of income has gained pace in the past five years and especially over the past 12 months.

From LSEG IBES:

483 companies in the S&P 500 Index have reported earnings for Q2 2026. Of these companies, 85.7% reported earnings above analyst expectations and 11.2% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 80% of companies beat the estimates and 16% missed estimates.

In aggregate, companies are reporting earnings that are 8.5% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.4% and the average surprise factor over the prior four quarters of 7.5%.

Of these companies, 77.3% reported revenue above analyst expectations and 22.7% reported revenue below analyst expectations. In a typical quarter (since 2002), 63% of companies beat estimates and 37% miss estimates. Over the past four quarters, 73% of companies beat the estimates and 27% missed estimates.

In aggregate, companies are reporting revenues that are 3.6% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 2.2%.

The estimated earnings growth rate for the S&P 500 for 26Q2 is 53%. If the energy sector is excluded, the growth rate declines to 49.2%.

The estimated revenue growth rate for the S&P 500 for 26Q2 is 15.6%. If the energy sector is excluded, the growth rate declines to 13.5%.

The estimated earnings growth rate for the S&P 500 for 26Q3 is 29.4%. If the energy sector is excluded, the growth rate declines to 26.1%.

 

Shame on S&P Global which would not care to normalize earnings for non-operating investment gains.

Factset does it (my emphasis):

With NVIDIA reporting actual results for Q2 on August 26, all the companies in the “Magnificent 7” have now reported earnings for the second quarter. (…)

On June 30, the estimated earnings growth rate for the “Magnificent 7” companies for Q2 was 30.8%. (…) In aggregate, earnings reported by the “Magnificent 7” companies exceeded estimates by 66.2%, compared to 26.5% for all S&P 500 companies.

As a result, the “Magnificent 7” companies reported actual earnings growth of 118.5% for the second quarter, which is the highest earnings growth rate reported by these seven companies going back to at least Q4 2020 (when Tesla joined the S&P 500).

On the other hand, the blended earnings growth rate for the other 493 S&P 500 companies for Q2 is 31.8%, which is the highest earnings growth rate reported by this group of companies since Q4 2021 (32.4%).

The top five contributors to earnings growth for the S&P 500 for Q2 2026 are (in order) Alphabet, Amazon.com, Micron Technology, NVIDIA, and Chevron. Thus, three of the top five contributors are “Magnificent 7” companies.

However, it should be noted that EPS reported on a GAAP basis by Alphabet and Amazon.com was used for both the earnings surprise and the earnings growth rate calculations, as the majority of analysts contributing EPS estimates to FactSet for these two companies are providing EPS estimates on a GAAP basis. Alphabet and Amazon.com historically have only reported EPS numbers on a GAAP basis.

Both Alphabet and Amazon.com reported substantial increases in other income for the second quarter due to investment gains, which were included in their (GAAP) EPS numbers.

The (GAAP) EPS actual for Alphabet for Q2 included a gain of $98 billion in other income primarily due to net unrealized gains on equity securities, while the (GAAP) EPS actual for Amazon.com for Q2 included a gain of $53.4 billion in other income primarily due to investments in Anthropic.

Excluding Alphabet and Amazon.com, the earnings growth rate for the “Magnificent 7” companies falls to 43.2% from 118.5% and the earnings surprise percentage for the “Magnificent 7” companies for Q2 falls to 4.4% from 66.2%.

While all publicly traded U.S. companies report EPS on a GAAP (generally accepted accounting principles) basis, many U.S. companies also choose to report EPS on a non-GAAP basis. There are mixed opinions in the market about the use of non-GAAP EPS. Supporters of the practice argue that it provides the market with a more accurate picture of earnings from the day-to-day operations of companies, as items that companies deem to be one-time events or nonoperating in nature are typically excluded from the non-GAAP EPS numbers.

Critics of the practice argue that there is no industry-standard definition of non-GAAP EPS, and companies can take advantage of the lack of standards to exclude items that (more often than not) have a negative impact on earnings to boost non-GAAP EPS.

On the other hand, EPS reported on a non-GAAP basis by NVIDIA, Micron Technology, and Chevron was used for both the earnings surprise and the earnings growth rate calculations, as the majority of analysts contributing EPS estimates to FactSet for these three companies are providing EPS estimates on a non-GAAP basis.

Chevron ($6.06 vs. $6.11) and NVIDIA ($2.22 vs. $2.46) reported lower non-GAAP EPS than GAAP EPS, while Micron Technology ($25.11 vs. $24.67) reported higher non-GAAP EPS than GAAP EPS. The non-GAAP EPS reported by NVIDIA for Q2 excluded investment gains.

Looking ahead, analysts expect the other 493 S&P 500 companies to report higher earnings growth than the “Magnificent 7” companies in Q4 2026 (26.8% vs. 23.2%).

There should not be any debate. Investors need to know what recurring, operating earnings and margins are.

Factset adds:

Alphabet’s paper revaluation alone accounted for roughly 10% of the entire S&P 500’s quarterly net income, while Amazon’s accounted for another 5%. In total, these non-operating tech markups were responsible for driving nearly 40% of the entire index’s massive “earnings surprise“.

There was more than GOOG and AMZN:

• GOOG: $98.0B
• AMZN: $53.4B
• MSFT: $3.2B
• TSLA: $1.0B
• EchoStar: $9.7B
• NIKE: $0.52/sh on $0.72/sh total.

Add the tariff refunds companies are now recording. My AI lists 12 companies having recently recorded tariff refunds totaling $11.1B.

So beware of trailing EPS until this MtM episode fades. Look at cashflows instead or forward EPS which should not include any expected gains but necessitate forecasts.

On margins:

Dealroom:

The S&P 500’s aggregate net profit margin vaulted to a record-high 16.9%. This severely overstates standard corporate profitability, far exceeding the index’s historical 5-year average of 12.4%. Excluding these top tech giants drops the normalized index margin to roughly 15.0%. While 15% is still historically robust, it reflects a far more grounded operational environment than the headline 16.9% suggests.

  But there is much more to earnings and margins:

As we all know, hyperscalers are spending humongously on data centers, more than $800B this year alone and likely over $1T next year.

Their capex spending is somebody else’s revenues. Think chip makers but also contractors, suppliers of infrastructure and energy/electrical equipment, etc.. It hits broadly among Industrials (Q2 revenue growth: 11.9%), Materials (9.6%), Energy (42.2%), Technology (36.8%), Comm. Services (12.6%) and Utilities (5.3%). Total S&P 500 revenues were up 15.6% in Q2; the US GDP deflator was up 4.4%.

The different accounting treatment of the revenues/profits and the capex investment creates a timing mismatch that temporarily boosts profit margins because of the current unusually large numbers involved.

Capex recipients recognize revenues and earnings immediately while the capex spenders capitalize the cash outlays and amortize (depreciate) them over several years.

This timing difference is normally not meaningful but this huge capex frenzy is truly unprecedented.

Many large and small suppliers see a revenue/profit windfall from a few humongous capex spenders which only record costs as the assets are gradually depreciated.

So the S&P 500’s 16.9% profit margin is not only artificially inflated by huge mark-to-market (non-operating, non-recurring) gains, the normalized 15.0% margin is also inflated by the mismatch in the accounting treatment of those capex.

Eventually, this mismatch will also normalize and even reverse when capex will slow but depreciation expenses will endure.

Analysts and investors have a habit of extrapolating recent trends. Beware of this one, most, if not all, of it is artificial and unsustainable.

Total US corporate profit margins were boosted by lower tax rates and the pandemic. They are now boosted by AI:

Kevin Warsh: the Hawk at Jackson Hole How much clearer can the Fed Chairman be about taming inflation?

Now will Wall Street and the scolds in the financial press believe Kevin Warsh? The new Chairman of the Federal Reserve on Friday delivered his firmest statement to date of his determination to tame inflation, and the clearest explanation of how he thinks the Fed should get there. (…)

Mr. Warsh’s speech Friday at the Kansas City Fed’s annual confab at Jackson Hole, Wyo., should put all that to rest.

His central point was that the Fed isn’t done fighting inflation and won’t be until its traditional measure of price rises has slowed back to 2%. He conspicuously played down signs of disinflation in recent months by noting evidence that prices for too many goods continue to rise too quickly.

Mr. Warsh’s assertion that he’d be “hard pressed to describe broad financial conditions as restrictive” is a notable contrast with his predecessor, Jerome Powell, who believed the Fed already had tightened enough to tame inflation sooner or later. None of this is specific forward guidance, yet it’s a firmer message on inflation than markets have heard from the central bank in some time. (…)

AI’s effect on the economy and monetary policy will depend on a wide range of unknowns concerning which sorts of firm prove most profitable, how AI affects employment, and other factors. (…)

His speech should put another canard to rest. Among the task forces Mr. Warsh has created to advance reform at the Fed, the panels on data sources and inflation dynamics have given rise to a view that he’s looking for excuses to be more dovish. Wall Street worked itself into a lather over the idea that the Fed could adopt a more forgiving inflation measure than the personal-consumption-expenditure index the central bank tracks.

Instead, on Friday Mr. Warsh rejected the assumption embedded in the Fed’s current economic models that inflation naturally reverts to its 2% level over the longer term. This puts the Fed back on the hook for every tenth of a percentage point of its inflation mandate. His emphasis on real-time data seems intended to avoid the backward-looking false dawn that led the Powell Fed to cut rates prematurely in two rounds in 2024 and 2025.

While the usual Keynesian suspects will claim it’s old-fashioned, Mr. Warsh’s assertion that “money has something to do with monetary policy” is another way of holding the Fed accountable.

He acknowledges financial technology has changed the definition of the money supply and money’s velocity. But Mr. Warsh seems to be saying the Fed shouldn’t be blind to early warnings, such as asset-price run-ups, that its policies are too loose. If only his predecessors had thought the same. (…)

• Markets Brace for Possible Rate Hike After Kevin Warsh’s Hawkish Turn

(…) Warsh’s suggestion that the Fed might have more “work to do” to fight inflation suddenly put a September interest-rate increase in play. Interest-rate futures showed traders now see a roughly 58% chance that the Fed will raise rates at its next meeting, up from 35% on Thursday, according to CME Group data. (…)

The start of September kicks off what has historically been a bumpy month for the stock market. Warsh’s speech left his options open and traders still relatively unsure where monetary policymakers will land at their next meeting on Sept. 16, said Kristian Kerr, head of macro strategy for LPL Financial. (…)

FYI:

• S&P 500 DRAWDOWN AFTER AUGUST IN EVERY RECENT MIDTERM ELECTION YEAR:

@zeroXhope

Goldman Sachs’ economist Pierfrancesco Mei just published a timely analysis that all FOMC members should read:

Looking for Pockets of Overheating

(…) some Fed officials have highlighted resource constraints connected to the AI boom as a source of inflationary pressure, which raises the broader question of whether there are pockets of overheating beneath the surface. We use industry-level data, including alternative data measures of utilization rates in the services sector, to assess the extent of capacity constraints.

• We find few pockets of overheating in the labor market. Across most industries, the jobs-workers gap has fallen below its pre-pandemic level, and in the few industries where it remains somewhat elevated, such as wholesale trade and healthcare, it has eased significantly from its pandemic peak. Nor do we find signs of regional labor shortages (…). Consistent with this, the breadth of elevated wage growth remains moderate: about 35% of industries are seeing nominal wage growth above 4%—the pace we estimate is consistent with 2% inflation—somewhat above the 25% average over 1990-2019 but well below the 90% peak in 2022.

• We also see only limited evidence of capacity constraints binding in the manufacturing sector. Most manufacturing industries operate well below their maximum potential output, and only a few are nearing their peak rates of capacity utilization reached in recent business cycles—notably, electrical equipment and machinery manufacturers, likely reflecting AI-related demand. Overtime hours worked, which tend to lead pickups in capacity utilization, also remain well below their sector-specific peaks.

• (…) most [services] industries remain well below their peak utilization rates of the past two decades, with the exception of professional services—where certain consulting activities are likely supporting the AI transition. We also find that our combined services capacity utilization index helps to forecast services inflation, but at the moment it is running only slightly above its long-run average and implies only modest additional inflationary pressure in the services sector.

• We combine our labor market, manufacturing sector, and service sector measures of capacity constraints into a composite bottlenecks indicator that tracks the share of industries where the jobs-workers gap, wage growth, or capacity constraints are particularly elevated. Our bottlenecks tracker has ticked up slightly in recent months—largely reflecting a widening of the jobs-workers gap in a few sub-sectors whose labor markets firmed after the weakness in 2025—but remains in line with its pre-pandemic level. This suggests that pressures are not unusually broad-based and that pockets of overheating remain limited so far.

K-shaped capex:

If GS is right, PPI inflation should shortly retreat back down instead of pulling overall inflation up:

Here’s the core version:

Productivity?

• Headline CPI is +3.8% YoY while Unit Labor Costs are up 1.4%. Correlation: 53%.

• Headline CPI is +3.8% YoY while Labor Productivity (output per hour) are up 2.2%. Correlation: –39%.

Kevin Warsh last week:

We recognize that AI is a new variable—potentially a new factor of production—that will have consequences for both the economy and the conduct of monetary policy. It opens some major lines of inquiry:

Will the application of AI cause a significant, sustained rise in productivity across the economy? And if so, when?

Some companies, notably WMT and AMZN, said that they will use tariff refunds to lower prices.

But some nasty inflationary pressures remain:

• Hormuz/Red Sea: impact on costs and availability.
• Russia/Ukraine.
• Demand from defense spending worldwide.
• Demand from green energy spending.
• AI demand.
• Supply chains deglobalization.

All urgent demands that are price/costs insensitive

Good luck with that call.

Did Kevin Warsh help us on that last week?

• Certain sectors—like housing and agriculture—are showing strains. But, on balance, I would be hard pressed to describe broad financial conditions as restrictive.
• Combining consumption with the brisk investment we’ve observed, private domestic final purchases (PDFP) has also risen. PDFP has increased at a pace of nearly 3 percent so far this calendar year. That’s a measure that typically carries more signal than gross domestic product, and the trend here too is positive.
• But on the price-stability side of our mandate, the numbers are more concerning. The Fed’s preferred measure of inflation, the 12-month change in the PCE price index, stands at 3.7 percent, while the six-month change is 4.1 percent. The comparable measures from the consumer price index (CPI) are also elevated, as are the core measures of both PCE and CPI inflation. None of these measures are perfect, but they all tell a similar story: Inflation is running above our 2 percent target. So the Fed’s predominant focus right now should be on prices.
• The job for policymakers is to capture underlying trend inflation—that is, the generalized change in prices in the economy, unaffected by idiosyncratic factors. (…) And while this summer’s PCE and CPI readings were better than expected, they do not tell me that underlying trends have meaningfully improved.
• The data also show moderate wage growth. But in tracking underlying inflation, wage growth has not proven a reliable indicator of future inflation for a very long time.
• Over the past 12 months, 54 percent of goods and services in the PCE basket showed price increases above 3 percent. (…) it remains well above the level of 32 percent in the two decades that preceded the pandemic. Looking over just the past six months, the conclusion is similar: Of goods and services in the PCE basket, 49 percent showed annualized price increases above 3 percent. (…) still quite elevated.
• The recent rise in overall commodity prices also bears watching. What we need to judge is whether trends indicate upside inflation risks.
• The thing about market measures of inflation expectations in economic history is that they tend to look strong and durable until they don’t. Those expectations are not pushed around easily, and right now they are well anchored. But they must be closely minded. It’s the Fed’s job to make sure that inflation expectations do not get unanchored.

On one hand, on the other hand. Some things never change.

But markets read him hawkish.

The Strongest El Niño in a Generation Is Wreaking Havoc on Global Economy The weather phenomenon is already roiling industries, from shipping to copper to fish feed

(…) Scientists monitoring data from satellites and ocean buoys declared the onset of El Niño in June. It is shaping up to be among the strongest in living memory. Ocean temperatures are the highest on record, with this belch of Pacific heat adding to the warming driven by greenhouse-gas emissions. (…)

Callahan’s research suggests that El Niño events can cause trillions of dollars in lost income, particularly in tropical economies. They will become more challenging as the climate warms, scientists say, adding heat to a planet where some extreme-weather events are already intensifying. El Niño is expected to persist into 2027, which is widely forecast to be the hottest year on record.

Among those bracing for impact are shipping companies using the Panama Canal. El Niño is turning the waterway into another chokepoint in a global economy riddled with them, from the Strait of Hormuz to the parched Rhine.

The canal loses 50 million gallons of water whenever a ship passes through, and is replenished by Lake Gatún, its main reservoir. El Niño spells dryness in Panama. Rainfall between May and August was 34% below the historical average.

The canal’s operator said this month it would reduce the maximum number of vessel transits from 36 to 32 by mid-September. The average auction price for ships using the largest locks surged to $2.5 million in recent weeks from typical levels around $800,000 as shippers race to beat the drought. The canal was already unusually busy as shippers avoided Hormuz. (…)

Elsewhere, excess precipitation is the problem. Chilean copper producer Antofagasta reduced its production forecast after a freak storm deposited 5 million cubic meters of snow into its Los Pelambres mine in July, causing a stoppage.

The mine was beneath an atmospheric river that inundated much of Chile, a rare occurrence that meteorologists said was consistent with a strengthening El Niño.

The lost supply squeezes an already tight market. Copper prices have been setting records, boosted by surging demand from electrification and the metal-intensive data-center build-out.

El Niño could deliver more disruption. In the last episode, from 2023 to 2024, drought sapped hydropower output in Zambia, hitting copper producers. Analysts at research firm CRU said dry weather associated with El Niño is already affecting river-borne logistics at a major mine in Papua New Guinea. (…)

But economists say the overall impact is likely to be less growth and more inflation, notably in Asia’s emerging economies. A recent Bloomberg Economics study found that consumer prices increase nearly 2 percentage points in Indonesia and the Philippines after an El Niño-influenced drought.

Most exposed are millions of farmers already reeling from higher fertilizer and diesel costs because of the Iran war. At the end of July, conditions around the world were generally positive for wheat, maize, rice and soybeans, according to a recent report by an international crop-monitoring group, but it warned of growing dryness in Asia’s rice fields. India’s monsoon rain is running 13% behind the average level for this time of year. (…)

Economists at S&P Global Ratings said preparatory measures, from larger grain reserves to investments in water management, should shield exposed Asian economies—even if “El Niño’s wrath is unavoidable.”

Concerns El Niño will hit harvests are boosting prices for some agricultural commodities, including cocoa and sugar. Some big producers and crop buyers insist they are well prepared. Chocolate producers such as Hershey have said the cocoa market is better supplied now than it was before the last El Niño, when heavy rain followed by drought battered two key producers, Ivory Coast and Ghana. A Hershey representative said that El Niño doesn’t always mean a bad West African crop, and that the company is diversifying its sourcing. (…)

• War, Weather Push Crop Prices to Biggest Monthly Gain Since 2012

The Bloomberg Agriculture Spot Index, which tracks 10 major products, is up more than 13% in August as of Friday, heading for the steepest gain since July 2012. Wheat has been one of the biggest drivers, with prices rece ntly reaching a three-year high as Black Sea port attacks slash shipments from a major growing region. Sugar and cocoa are also up about 20% as a strengthening El Niño fuels weather worries.

While it can take time for pricier crops to feed through to supermarket shelves, the gains come on top of rising energy and transport bills driven by the war in Iran. That’s fueling worries about the cost of everyday pantry staples from bread to meat and dairy.

For wheat, grain exports from Ukraine and Russia have slowed as both sides strike each other’s ships and ports. Russia is also preparing to escalate attacks after concluding that negotiations for a peace deal have reached a dead end, Bloomberg reported last week.

Together, the two nations account for more than a quarter of the world’s wheat exports, as well as large amounts of barley, corn and sunflower oil. That’s leaving few obvious options to fill the gap, Lachstock Consulting said in a Monday note. Unsold grain is piling up, and Ukraine’s agriculture ministry expects farmers to plant less winter-wheat for the 2027 season.

“Argentine quality is questionable, Canada has limits, Australia has export capacity constraints and US wheat is increasingly the expensive residual supplier,” Lachstock said. “Unless Black Sea exports begin flowing again, the market increasingly looks to be dealing with a multi-season supply issue rather than a short-term logistics problem.”

Poor weather has been another headache, with US and European corn harvests both hit by summer heat waves. A powerful El Niño is also set to pose risks to crops into next year. That has boosted commodities like cocoa, with concerns over how the weather phenomenon will impact crop development in the top growing region of West Africa.

New York sugar futures are up about 20% in August, the most since 2015, as major producer India faces tight stockpiles just as demand climbs for the festival season. The government recently took the rare step of allowing some duty-free imports in an effort to curb prices.

Renewed tensions in the Middle East are also reviving worries about fuel and fertilizer flows, vital inputs for the world’s farmers. The US struck Iranian rocket launchers over the weekend, its first military action against the country in weeks.

Trump Takes the Oil in Venezuela The deal recalls the famous Cuba scene in ‘The Godfather Part II.’

The WSJ Editorial Board:

President Trump has long said he favors “taking the oil” when the U.S. intervenes overseas, and now he is doing so in extraordinary fashion. His deal announced late Friday with unelected President Delcy Rodríguez for rights to 65 billion barrels of Venezuelan oil reserves looks less like a normal commercial transaction than it does the famous scene of U.S. businessmen meeting with the Cuban strongman in “The Godfather Part II.” (…)

The legal authority for this is far from clear, since the Defense Department is investing in a foreign entity. Can the Pentagon Office of Strategic Capital take such equity stakes?

Why is the Pentagon even playing in global oil markets when it has enough to do buying new weapons in short supply and reforming its broken procurement process? (…)

The politics of all this are even more complicated, to put it mildly. The U.S. government is essentially getting in bed with a foreign dictator and her favored capitalist. Any foreign firm that invests will have all three as de facto partners, but Mr. Trump will be out of office in 2029 and the heavy-handed U.S. role might not play well over time in Caracas.

The oil deal will prop up Ms. Rodríguez, at least in the short term, and that may be part of Mr. Trump’s motivation. She has courted the President to survive in power and to stave off demands from the opposition to establish a process for new elections. Mr. Trump likes nothing better than a leader, elected or not, who bends to his wishes.

It’s notable that both the Venezuelan opposition and Ms. Rodríguez’s left-wing allies are criticizing the deal. The Bolivarian left views it as a concession to North American imperialism, and it will play that nationalist card if there is another election.

The democratic opposition views the deal as the act of an illegitimate president who has no right to turn over national resources to a business pal and a foreign government. It also fears that the deal will make it less likely that Mr. Trump and Secretary of State Marco Rubio will press for new elections. (…)

Much still isn’t known, but this all looks like an example of the Trump Administration extending its creeping crony statism beyond U.S. shores. In the “Godfather” saga, the Cuban dictator got a golden telephone from his visitors but was soon out of power.

Iran’s fight may be about more than the regime survival…