Month: August 2025

Note: I am travelling until August 11. Postings may be irregular and somewhat shorter than usual.

SERVICES PMIs: Conflicting surveys

S&P Global: Strongest rise in business activity in year-to-date

The S&P Global US Services PMI® Business Activity Index rose to a seven-month high of 55.7 in July, up from 52.9 in June. The latest reading signaled a marked monthly expansion of output in the service sector, extending the current sequence of growth to two-and-a-half years.

Where business activity rose, service providers often linked this to higher new orders, with anecdotal evidence also highlighting improvements in customer demand, the securing of new clients and work on new products.

New orders expanded for the fifteenth consecutive month in July. As was the case with activity, the rate of expansion in new business picked up from June. The latest rise was solid and the fastest since January. The increase in total new business was recorded in spite of a further reduction in new export orders as tariffs – and government policy-related factors – continued to negatively impact inflows of new business from abroad. New export orders have now decreased in each of the past four months, although the latest reduction was only marginal and the slowest in this sequence.

Tariffs also had a clear impact on price pressures, according to anecdotal evidence. Companies widely linked the latest increase in input costs to the effects of tariffs, while also mentioning higher salaries. Input prices rose sharply, with the pace of inflation accelerating from June and coming in above the series average.

Similarly, the pace of output price inflation quickened over the month and was steep. Panelists reported passing on tariff related rises in input costs to their customers. Here too, the increase was marked in the context of historical data. (…)

The pace of job creation remained only modest, however. Moreover, a number of firms reported that workers had been hired on either a part-time or temporary basis.

Looking to the future, companies remained optimistic that business activity will increase over the coming year. Positive sentiment reflected confidence in the securing of new orders amid planned marketing efforts and expected improvements in customer confidence. Optimism eased to a three-month low in July, however, and was weaker than the series average.

But the market is focusing on this pretty weak survey. In fact, neither the WSJ nor Bloomberg even mentioned S&P Global’s survey.

The ISM: Service-Sector Slowdown in July ISM

The ISM index fell to 50.1, a reading that is consistent with the slowest possible pace of expansion. It is the third-lowest reading since the pandemic year of 2020. While the service-sector is still expanding, that expansion looks like it is girding to a halt. (…)

The four components that feed into the headline have been sending mixed signals in recent months. In June, for example, business activity and new orders both picked up, while index readings for employment and supplier deliveries both came down. Note, however, that while employment was in outright contraction, supplier deliveries was still above 50.

Source: Institute for Supply Management and Wells Fargo Economics

(…) what’s changed here in the July data is that business activity, new orders and employment are all lower. Only supplier deliveries saw a higher reading, and that of course is an indication that wait times are lengthening once again.

Price pressures in the service sector remain acute and widespread. June was technically cooling in cost pressure as the index came down to 67.5, but that is from the lofty reading of 68.7 in May. The July reading of 69.9 is the highest since late-2022 and indicates price pressures are impacting more businesses in the service sector.

We routinely hear from businesses about the challenges of rising costs and the politically fraught task of passing on tariffs. This dynamic has scope to slow capital outlays (and/or) weigh on profits. This dynamic was captured well by a health care provider who observed “Tariffs are causing additional costs as we continue to purchase equipment and supplies. Though we need to continue with these purchases, the cost is significant enough that we are postponing other projects to accommodate these cost changes.”

Another place to cut cost is payroll and the employment component fell to 46.4, marking the fourth time in five months that this component has been in contraction territory. Yet the select industry comments continue to highlight the unique traits surrounding today’s jobs market when it comes to supply.

Specifically, the release notes continued trouble finding qualified candidates. “Lost a few service technicians; still difficult to recruit in this market” and “We have lost employees due to normal attrition and are having issues backfilling these positions with qualified candidates.”

The surveys only agree on prices (up) and, to a lesser extent, on employment (slowing).

ING:

[ISM] Employment fell to 46.4 from 47.2, which doesn’t bode well for August’s jobs report given we already knew the manufacturing employment version dropped to the weakest level since June 2020. If we weight them 90% for services and 10% for manufacturing we see that these readings are historically consistent with non-farm payrolls dropping by more than 100,000.

While the relationship with payrolls hasn’t been as strong since the pandemic, at the very least it suggests we should be braced for soft jobs growth through the second half of the year at the very least. In particular, Federal government workers who accepted the severance packages from the Department of Government Efficiency are set to drop off employment numbers in September.

Select ISM Industry Comments

“Anticipation of the final tariff impacts is resulting in delayed planning for next fiscal year purchases.” — Accommodation & Food Services

“Higher tariffs are increasing the cost of imported feed ingredients and trace minerals for livestock and poultry feeds. Business and customer concerns over additional cost risk due to additional tariffs.” — Agriculture, Forestry, Fishing & Hunting

“Trade uncertainty causing client reevaluation of feasibility for projects in certain sectors, resulting in some delays or cancellations.” — Construction

“Steady business activity.” — Finance & Insurance

“Economic uncertainty remains the dominant theme. However, the tariff talk has turned out to be much more bluster than actual policy, and businesses have seemed to tune out the noise. The outlook continues to look incrementally positive.” — Real Estate, Rental & Leasing

“Retail results are solid — a little soft before and during Fourth of July week, but then a rebound. We see no reason to believe this won’t continue for the near term.” — Retail Trade

From The Transcript:

“Consumer spending remains healthy. This is true across both affluent as well as mass market consumers.”  – Mastercard ($MA ) CEO Michael Miebach

“Within the U.S., while spending growth differed among consumer spend bands, all spend bands in Q3 remained resilient and consistent with past quarters. Within spend categories in the U.S., we saw relative stability to Q2 when adjusted for leap year impacts. Both U.S. discretionary and nondiscretionary spend growth remains strong, and we see no meaningful impact from tariffs.” – Visa ($V ) President Ryan McInerney

“What we can tell you is what we’ve seen so far in the first half of the year, in the first half, we just haven’t seen diminished demand. And we haven’t seen any kind of broad scale ASP increases. And so that could change in the second half. There are a lot of things that we don’t know, but that’s what we’ve seen so far.” – Amazon ($AMZN ) CEO Andrew Jassy

“Turning to credit performance. The health of our consumer remains strong and we’re not seeing any signs of weakness…Our credit trends continue to be strong after seeing delinquencies peak early last year.” – SoFi Technologies ($SOFI ) CFO Christopher Lapointe

“The year has started great for us and normally we would now be very bullish in our outlook for the full year. We feel the volatility and uncertainty in the world does not make this prudent. We still do not know what the final tariffs in the US will be. We have already had a negative impact in the double-digit euro millions in Q2 and the latest indications of tariffs will directly increase the cost of our products for the US with up to €200 million during the rest of the year. We do also not know what the indirect impact on consumer demand will be should all these tariffs cause major inflation. I have seen that many companies have either removed their Outlook fully or reduced it dramatically.” – Adidas (ADS.DE) CEO Bjørn Gulden

“We’re mindful that consumers are just beginning to feel the impact of higher prices. We’ll see more pressure in the back half on the margin, and that’s going to largely be driven by the tariffs coming into effect…there’s a dynamic where the tariffs are coming in before our price increases on a full year basis are able to offset that.” – Deckers Outdoor ($DECK ) CFO Steven Fasching

“We continue to hold a strong order book entering 2027 without considering the new launched cars, and with all the range models currently in production substantially sold out. Indeed, the newly launched Ferrari Amalfi is at the initial stage of the order collection, and the demand for the 296 Speciale family is significantly high, nearly reaching full coverage of the life cycle.” – Ferrari N.V. ($RACE ) CEO Benedetto Vigna

“We saw an incredibly anemic housing and construction markets this year. I don’t think we’ve seen anything like this since COVID and since The Great Recession before that. So there’s — I think there’s a great deal of uncertainty around people wanting to commit to what is usually the largest purchase in their lifetime during times of market volatility and uncertainty and also with higher interest rates.” – Huntsman Corp ($HUN ) CEO Peter Huntsman

“For the June quarter, we incurred approximately $800 million of tariff-related costs. For the September quarter, assuming the current global tariff rates, policies and applications do not change for the balance of the quarter and no new tariffs are added, we estimate the impact to add about $1.1 billion to our costs.” – Apple ($AAPL ) CEO Timothy Cook

“Think the green shoots, I talked about them are what we’re seeing in booking behavior on the group side and what we’re seeing very recently on the corporate business transient side, which is saying that the wait and see, it’s thawing, the freeze of April, May and to a degree, June we’re starting to see a thaw, but it’s really early, which is why my comments, and I know this is quite a filibuster I’m going here, and so there’ll be no more questions probably.” – Hilton Worldwide ($HLT ) CEO Christopher Nassetta

Note: I am travelling until August 11. Postings may be irregular and somewhat shorter than usual.

EARNINGS WATCH

From LSEG IBES:

330 companies in the S&P 500 Index have reported earnings for Q2 2025. Of these companies, 80.6% reported earnings above analyst expectations and 15.2% 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, 76% of companies beat the estimates and 18% missed estimates.

In aggregate, companies are reporting earnings that are 8.3% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.3% and the average surprise factor over the prior four quarters of 6.3%.

Of these companies, 78.5% reported revenue above analyst expectations and 21.5% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 62% of companies beat the estimates and 38% missed estimates.

In aggregate, companies are reporting revenues that are 2.6% 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 1.2%.

The estimated earnings growth rate for the S&P 500 for 25Q2 is 11.2%. If the energy sector is excluded, the growth rate improves to 13.2%.

The estimated revenue growth rate for the S&P 500 for 25Q2 is 5.6%. If the energy sector is excluded, the growth rate improves to 6.8%.

The estimated earnings growth rate for the S&P 500 for 25Q3 is 8.4%. If the energy sector is excluded, the growth rate improves to 9.1%.

Trailing EPS are now $256.17. Full years 2025e: $264.86. Forward EPS: $281.15e. Full year 2026e: $301.44.

Not only are margins still rising, revenues are meaningfully beating expectations (guidance) growing at 6.8% ex-E when inflation is ~3.0%. Part productivity, part energy but a large part revenue growth when domestic demand is rather weak. Tariff front-running?

Much of the revenue growth comes from tech (+15.3%) and communication services (+8.5%) but revenue surprises are everywhere.

Goldman Sachs:

Although NVDA will not report until August 27, the Magnificent 7 apparently grew earnings by 26% year/year during 2Q, compared with 4% for the remaining 493 constituents of the S&P 500. That 22 pp gap in earnings growth rates compares with a consensus estimate of 14 pp at the start of the season.

Commentary from 2Q earnings calls so far has reflected corporate confidence in the ability to mitigate the impacts of tariffs on profits. The most commonly cited strategies include managing supply chains, increasing prices, and cutting other costs. Of companies discussing the impact of tariffs on their businesses, 27% explicitly stated they now expect the profit headwind from tariffs to be smaller than their previous estimate.

We continue to see roughly balanced risks around our S&P 500 earnings forecasts. Our 2025 EPS forecast of $262 (+7% y/y growth) compares with $267 for the bottom-up consensus and $261 for the top-down consensus. For 2026, our forecast of $280 (+7%) compares with $302 (+13%) for the bottom-up consensus and $285 (+9%) for the top-down consensus.

2Q results so far have provided incremental confidence in the ability of companies to mitigate the cost pressure from tariffs, but that pressure should increase in the second half of the year, and the price increases that protect margins create downside risk to real revenue growth. However, mega-cap tech remains a tailwind for index earnings, and fiscal policy should provide a modest boost heading into 2026.

The beats are impressive and lead to almost maximum investor optimism …

… right when the economy is showing first signs of weakness.

KKR:

• Net of revisions, the economy created fewer than 20k new jobs in May-June. Such a weak run of job creation outside of recession is unprecedented in the postwar U.S..
• We remain in a manufacturing recession, with jobs in this area including both total goods and manufacturing negative for the third month in a row (and now ISM manufacturing has been below 50 for 30 of the last 32 months).
• 79,000 of the 73,000 total jobs, so overall 100% of job growth, and 95% of private sector growth (79,000 of 83,000) came from Healthcare/Education. However, the overall breadth of services has narrowed with professional services showing a negative 14,000 jobs and leisure/hospitality falling to just 5,000 this month.

Yes, the unemployment rate did not rise much, because the labor supply shrank due to immigration policies. But that does not make for a strong economy, it mainly helps keep wages high.

But OPEC is still helping:

OPEC+ Agrees to Big Output Hike as Focus Shifts to Its Next Move

Saudi Arabia and its partners agreed on a video conference to add 547,000 barrels a day next month. This completes the accelerated reversal of a 2.2 million-barrel cutback made by eight members in 2023, and also includes an extra allowance being phased in by the United Arab Emirates.

The latest hike caps a dramatic shift from the Organization of the Petroleum Exporting Countries and its partners, from defending prices to opening the taps. Their pivot has helped cap oil and gasoline futures amid geopolitical tensions and strong seasonal demand, offering some relief for drivers and a win for US President Donald Trump. But the added barrels are hitting a market that is already heading toward a sizable surplus.

OPEC+ will keep its options open regarding another layer of halted output, amounting to about 1.66 million barrels, which currently expires at the end of 2026, three of the delegates said. Its revival will depend on the health of market fundamentals, they emphasized, with one adding the possibility of a review later this year. The eight nations scheduled a follow-up meeting for Sept. 7. (…)

World oil markets face a surplus of 2 million barrels a day in the fourth quarter as Chinese consumption cools and new supplies swell in the US, Canada, Brazil and Guyana, according to the International Energy Agency in Paris. Forecasters on Wall Street, including JPMorgan Chase & Co. and Goldman Sachs Group Inc., expect prices will sink towards $60 a barrel by the end of the year. (…)

What If the US Isn’t the World’s Most Innovative Country? The question of who is winning the innovation race is more complicated than it appears — and the answer is more interesting.

One of the barriers to understanding the world is our fixation on sports thinking: Who is winning and who is catching up? (…)

Looked at through this sports prism, the innovation landscape is simple. The US is still far ahead. America is responsible for almost all the breakthrough technologies that define the current era (AI, smart phones, social networks) just as it was responsible for all the breakthrough technologies that defined the last era (PCs, the internet, semiconductors). Three of the world’s most consequential AI companies — OpenAI Inc., Anthropic PBC and Databricks Inc. — are headquartered within two miles of each other in San Francisco. Nvidia Corp. is so dominant in the market for high-end chips that one commentator remarks that “there’s a war going on in AI out there, and Nvidia is the only arms dealer.”

Yet China is breathing down America’s neck — and in some areas, such as surveillance and hypersonic rockets, it’s taking the lead. The most cited paper on AI, known as the ResNet paper, was written by four Chinese scholars who have never studied outside the country.

More than 1,300 foreign companies have opened advanced scientific research labs in China to tap into the country’s growing talent pool. And Europe? The combined value of all the tech companies on the continent is far less than the value of just one US company, Microsoft Corp. (…)

A new book by Mehran Gul, of the World Economic Forum, The New Geography of Innovation, suggests that the picture is much more interesting. There are, in fact, lots of different innovation races with different end points and different measures of success.

The US might be good at breakthrough innovation in the private sector. But what about incremental innovation in the public sector? Feed in different measures, and you get different results.

If you focus on the dissemination of new ideas rather than their invention, China is arguably well ahead of the US. It is well documented that China excels as a fast follower thanks to its combination of engineering prowess and work ethic. China has twice as many miles of high-speed rail than any other country. BYD Co. Ltd sold nearly 607,000 EVs in the second quarter of this year compared with Tesla’s 384,000. SZ DJI Technology Co. Ltd sells more commercial drones than everyone else combined.

But today the country is doing something more exciting — taking ideas that exist in laboratories and commercializing them before anybody else.

Beijing and Shanghai have hundreds of driverless taxis roaming the streets. Giant companies such as Alibaba Group Holding Ltd. and Baidu Inc. are best understood as innovation-and-execution machines. If America still leads the world in inventing the future, China leads in bringing it to life.

But focus on the public sector rather than the private sector, and a different innovation champion emerges: Singapore.

Most countries count themselves as winners in the government-reform stakes if they can digitalize regular government functions. The government of Singapore conducts all its interactions with its citizens online but goes much further than this. It uses sensors in the streets to monitor and direct the flow of traffic, drones to survey areas affected by the outbreak of disease, and motion sensors in public housing to monitor the wellbeing of the elderly.

The government has a collective brain — the Smart Nation and Digital Government Group (SNDGG) — that attracts the country’s most brilliant citizens and regards itself as a public-sector equivalent of Google. If most countries contract out high-tech operations to the private sector, Singapore keeps them in-house to develop unique competences; if most governments play catch up, SNDGG acts as a pace setter. (…)

Gul even offers some words about what is increasingly regarded as the left-behind continent of Europe. Germany excels in what might be called “deep” or “incremental” innovation: Its strength lies in middle-sized companies — the celebrated mittelstand — that produce highly specialized products and focus all their energies on making sure they are the best in the world.

These companies, which are usually hidden away in small towns, are so focused on engineering excellence that they have little time for PR: Herrenknecht AG is easily the world’s most impressive tunneling company but has only attracted a fraction of the attention of Elon Musk’s cleverly-named The Boring Company.

Switzerland, where Gul lives, combines a similar enthusiasm for mittelstand companies with a genius for big public projects such as the Swiss railway system, surely one of the wonders of the world, the Large Hadron Collider, and CERN (the European Organization for Nuclear Research). Thanks to CERN, the world’s first web site was not a dot-com or a dot-net but a dot-ch, which stands for Confederatio Helvetica, Switzerland’s Latin name.

Can the case for Europe be extended any further than a few isolated areas of excellence? The classic argument for the European model is that it is much more sustainable than the American one — that it pays attention to things like sustainability and quality of life not just to billion-dollar exits.

What is the point of leading the world in AI if that AI is used to sell more cat food or get more clicks on cat videos? Some of these questions are even beginning to trouble people at the very heart of US tech: A recent book by Alex Karp, the chief executive officer of Palantir and Nicholas Zamiska, the company’s legal counsel, The Technological Republic, argues that the US innovation machine has focused too much on fripperies like delivery Apps and not enough on big ideas that will transform society.

The problem with Europe’s civilization-first approach is not that it’s ill-conceived, it’s that Europe’s failure to create world-changing companies that embody its values means it gets treated as irrelevant on the world stage. Gul is undoubtedly right that we need to measure innovation against a lot of different metrics, not just market capitalization. But sometimes you must be seen to be a winner in the global marketplace to carry any real influence.

Adrian Wooldridge could also have mentioned ASML Holding, a Dutch corporation headquartered in Veldhoven, Netherlands (population 46,000). ASML is the world’s leading supplier of photolithography machines critical for manufacturing semiconductor chips.

ASML is the only supplier in the world of extreme ultraviolet (EUV) lithography machines, essential for producing the smallest, most advanced chips found in devices like smartphones, laptops, and … data centers.

ASML is central to producing transistors below 4 and 2 nanometers, the ultra-high precision needed to “print” billions of tiny transistors on silicon wafers at incredibly small dimensions, enabling chipmakers to continue shrinking transistor sizes and packing more onto each chip.This is crucial for pushing the boundaries of artificial intelligence, data centers, and future digital devices.

ASML is thus a critical linchpin in the supply chain for very high-tech devices and software globally.

Each EUV machine can cost up to $400 million and take months to assemble, contributing to ASML’s monopoly on the most advanced lithography.

Because ASML’s technology confers so much power in chip manufacturing, its machines are subject to export controls, especially restrictions on EUV equipment sales to China. This places ASML at the center of major geopolitical and technological competition, as countries race to secure their chip supply chains.

US-driven export controls have barred ASML from selling its most advanced EUV machines to China and have recently begun restricting some advanced DUV (Deep Ultraviolet) systems as well. China, which can represent up to 27% of ASML’s system sales, is thus increasingly cut off from ASML’s core and critical offerings.

In effect, these export barriers significantly harm ASML as well as the economies of Holland and Europe.

In addition, tariffs on EU-made equipment—including ASML products—by the US will increase costs for American customers and consumers.

Meanwhile, China is eagerly seeking to develop homegrown alternatives to ASML’s critical technology. The only unknown is when.

American protectionism is thus stalling Europe from gaining more traction in tech equipment, including AI. When China will be ready, it might be too late.

Donald Trump fires US labour statistics boss after weak jobs report President claims July employment figures were ‘rigged’ in latest assault on economic institutions

Donald Trump has stepped up his assault on the US’s most important economic institutions, sacking the head of the country’s labour statistics agency just hours after a gloomy jobs report. (…)

“[McEntarfer] will be replaced with someone much more competent and qualified. Important numbers like this must be fair and accurate, they can’t be manipulated for political purposes,” Trump said, claiming without evidence that she had massaged figures to help the former president.

Shortly after Trump fired McEntarfer, Federal Reserve governor Adriana Kugler said she would step down months before the end of her term in January. The opening on the Fed’s policy-setting board paves the way for Trump to name a successor to chair Jay Powell, who is set to step down from the role in May 2026.

“‘Too Late’ Powell should resign, just like Adriana Kugler, a Biden Appointee, resigned,” Trump wrote on Truth Social. “She knew he was doing the wrong thing on Interest Rates. He should resign, also!” (…)

Sacking McEntarfer marked an unprecedented move by a president to intervene in the functioning of an agency that produces reports on the labour market and inflation, which underpin the pricing of trillions of dollars in assets globally. 

David Wilcox, the former head of the Federal Economic Statistics Advisory Committee, which was disbanded by the Trump Administration earlier this year, said firing the BLS commissioner would be “a serious blow to the integrity of the US statistical system”. (…)

“The Economy is BOOMING under ‘TRUMP’ despite a Fed that also plays games, this time with Interest Rates,” he wrote as he announced McEntarfer’s firing.

“Jerome ‘Too Late’ Powell should also be ‘put out to pasture’.”

Later, in an interview with conservative network Newsmax, Trump said he would sack Powell “in a heartbeat”, but then added that “they say it would disturb the market”. (…)

The FT is wrong saying this is unprecedented.

• Richard Nixon (1970s): Nixon attempted to secretly manipulate the Bureau of Labor Statistics, suspicious that Jewish economists at BLS were working against him. He ordered an internal survey on staff background, transferred senior officials, canceled press conferences, and reorganized the bureau

• Trump (2017-2021): Trump pressured the U.S. Census Bureau to change how undocumented immigrants were counted, sought to cut short the 2020 Census, and pressured staff on technical matters for potential political gain.

• Néstor & Cristina Fernández de Kirchner (2007-2025): Government officials ordered Argentina’s National Statistics and Census Institute (INDEC) to underreport official inflation rates. Statisticians resisting manipulation were fired.

• Andreas Georgiou, head of the Hellenic Statistical Authority, was prosecuted after refusing to underreport Greece’s official deficit statistics in 2010.

• Erdoğan has dismissed and replaced the head of TurkStat multiple times, four times since 2019, most recently firing Sait Erdal Dinçer in early 2022 after TurkStat reported inflation hitting a 19-year high.

• Under Hitler, statistical offices became tools of the regime, producing data to reinforce propaganda, facilitate oppression, and deceive both the domestic and global public about Nazi actions.

• Through control of communications, official inscriptions, and public events, emperors like Augustus and Octavian (Augustus) shaped public opinion to legitimize their rule and discredit adversaries.

• And let’s not forget China.

BTW:

Her supporters point out that as a career federal employee, she worked with administrations of both parties in various capacities. Colleagues describe McEntarfer as a levelheaded, nonpartisan analyst and administrator.

“She has an impeccable record,” The Friends of the Bureau of Labor Statistics, an independent organization that advocates for transparent government statistics, wrote in a public statement after she was fired. (WSJ)

FYI, courtesy of Callum Thomas: