US Services PMIs

S&P Global: Business activity growth softens, while selling prices rise at weakest rate in five months

The headline S&P Global US Services PMI Business Activity Index recorded 54.2 in September, down from 54.5 in August. Remaining above the critical 50.0 no-change mark, that separates growth from contraction, the index has now signaled continuous service sector expansion for 32 months. Furthermore, over the third quarter, average monthly growth was the best recorded over a calendar quarter in 2025 so far.

That said, the index has now fallen for two months in a row, representing a slowdown from July’s year-to-date peak. This reflected a similar softening of sales growth to a three-month low amid some reports that tariffs and broader uncertainty had limited gains in overall market demand. Foreign sales were a bright spot, however, with new export business up modestly and for the first time since March.

Despite evidence of ongoing capacity pressures – backlogs of work rose solidly for a seventh successive month in September – slightly softer rates of demand and activity growth led to some reluctance amongst US service companies to add to their staffing levels. The net result was only a marginal overall increase in employment, albeit still extending the current period of continuous payroll expansion to seven months.

Business confidence also improved in September, strengthening to its highest since May. Whilst there remains some uncertainty in the outlook, especially around tariffs, lower interest rates in some instances were reported to have boosted optimism by adding to hopes of a pickup of demand in the year ahead. Several panelists also linked their positive sentiment to expectations that federal government policies will support economic growth in the year ahead.

Tariffs remained a key source of cost pressures in September, which overall rose sharply and to a slightly faster degree than the previous month. Higher supplier charges and payroll expenses also added to upward pressure on company operating expenses.

Although overall costs again rose at an above trend pace, selling prices increased to the slowest degree since April (albeit also still higher than the historical rate). Whilst firms sought to pass on their higher input costs to clients, in some instances slower demand growth and competition limited pricing power.

The S&P Global US Composite PMI recorded 53.9 in September. That was down from 54.6 in August and represented the slowest growth for three months. Both sectors covered by the survey recorded weaker output expansions in line with slower gains in new business.

Employment meanwhile barely rose, but confidence in the outlook strengthened noticeably. Cost pressures remained elevated, although inflation softened to a five-month low. A similar trend was seen for output charges.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence

“Service sector growth softened slightly in September but remained strong enough to round off an impressive performance over the third quarter a whole. Combined with sustained growth in the manufacturing sector, the expansion of service sector activity is indicative of robust third quarter annualized GDP growth of around 2.5%.

“Growth is being fueled principally by rising financial services and tech sector activity, though we are also seeing more signs of improving demand for consumer-facing services such as leisure and recreation, likely linked in part to lower interest rates. Lower borrowing costs have also fed through to a broad-based improvement in business optimism about the outlook for the next 12 months.

“Disappointingly, the improvement in business optimism failed to spur more jobs growth, with hiring almost stalling in a sign of further labor market malaise as companies often focused on running more efficiently amid uncertain trading conditions.

“A further ongoing source of concern from the surveys are heightened cost pressures which survey respondents have attributed to tariffs. Input costs rose sharply again in September as import levies were seen to have again fed through from goods to services. However, rates charged for services rose at the slowest rate for five months in a welcome sign that some of these tariff price pressures in supply chains are starting to moderate.”

ISM: Services activity cooled as hiring slides

ISM services index for September has come in weaker than predicted, dropping from 52 (growth territory) to 50 (consistent with flat activity). The consensus prediction was 51.7, but the outcome was actually below all individual survey responses provided to Bloomberg.

The details show business activity dropping to 49.9 from 55.0. This is the worst outcome since the shutdown period of the pandemic in May 2020, while new orders fell from 56.0 to 50.4. The employment component rose to 47.2 from 46.5, but because it remains below 50, this increase merely means that the pace of job losses slowed last month. The chart below shows the output measures of both the services and manufacturing ISM series versus annual GDP growth, and based on the historical relationship, points to the risk of slowing growth in the coming quarters.

GDP growth (YoY%) versus ISM output metrics advanced 6 months

Source: Macrobond, ING

While we didn’t get the jobs report [Friday], the ADP private payrolls numbers earlier in the week suggest the jobs market continues to cool, while the job openings numbers within the JOLTS report show there are now more unemployed people in America than there are job vacancies.

At the same time, a slowing quits rate – a measure of job turnover – is pointing to wage growth dropping below 3% in early 2026. This combination of sub-trend growth and weakening jobs numbers will, we believe, drive the Fed’s interest rate decisions.

There are lingering concerns about tariffs pushing up prices and inflation, with today’s ISM prices paid series doing nothing to dispel them – it rose to 69.4 from 69.2, so well above the 50 break-even level. However, tariffs have come through more slowly than feared in the key inflation metrics the Fed focuses on, of CPI and the PCE deflator.

As such, the balance of risks to the Fed’s dual mandate of price stability and maximum employment justifies the central bank moving monetary policy closer to neutral with 25bp interest rate cuts at the October and December FOMC meetings expected.

WHAT RESPONDENTS ARE SAYING

• “We are beginning to see the impact of the tariffs impact our business, particularly for food products from India, China, and Southeast Asia, coffee from South America, and apparel and electronics from Asia. Our year-over-year cost increases are getting progressively greater.” [Accommodation & Food Services]
• “New residential construction continues to struggle in a tough market. Housing values remain high, and tariffs are beginning to be passed through on materials that are metal based. The pace of housing starts has been stagnant to slightly declining, as we head out of the summer building season.” [Construction]
• “Pharmacy costs continue to rise, and medical devices are being held at bay mainly due to contracts and continued negotiations where we have two to three sources for a given product.” [Health Care & Social Assistance]
• “Demand for artificial intelligence (AI) and cloud infrastructure remains very strong. Our primary focus this month was on increasing production throughput to begin clearing the significant order backlog built up over the summer. While new order intake has stabilized at a high level, the overall business outlook remains positive. We are still facing significant supply chain challenges, especially for advanced semiconductors and power components, with lead times remaining extended. Price pressures are still present but have not worsened compared to the previous month.” [Information]
• “Client demand in professional services remains steady, though decision-making timelines are lengthening due to continued economic uncertainty and interest-rate concerns. We are also seeing modest upward pressure on labor costs, which impacts both our internal resourcing and supplier pricing.” [Professional, Scientific & Technical Services]
• “The overall housing market remains stagnant, which has forced our company to be hyper-vigilant about costs. However, we are growing and increasing our market share despite the headwinds. Tariffs continue to inject an unnecessary level of uncertainty across the broader economy, and costs are now beginning to increase with the full effect of the tariffs now coming into play.” [Real Estate, Rental & Leasing]
• “Costs overall have stabilized, and we’ve not seen any interruptions in sourcing or shipments.” [Retail Trade]
• “We’ve had more tariff charges last month than in previous months.” [Utilities]
• “Business conditions continue to soften, even in markets that have historically been more resilient. Demand is simply weak.” [Wholesale Trade]

S&P Global sees GDP growth of 2.5% in Q3 but notes that the index has fallen in the last 2 months of the quarter with sales growth a three-month low, supported by a wholesaler saying “demand is simply weak”.

S&P also notes that “overall costs again rose at an above trend pace”, rising “sharply and to a slightly faster degree than the previous month”, supported by several ISM comments about tariffs increasingly biting.

But S&P also reports that “selling prices increased to the slowest degree since April” because “slower demand growth and competition limited pricing power.”

If ING is right and wage growth drops below 3% in early 2026, one better hopes inflation slows down materially, particularly with employment growth stalling.

Then demand could get worse than “simply weak” or profit margins will also become “simply weak”.

• Impact of Trump tariffs is beginning to show in US consumer prices Trade levies are starting to drive up costs for goods from cans of soup to car parts

(…) Since April, leading retailers have raised prices on 11 of 29 “soft line” products, such as T-shirts and shoes; 12 or 18 “hard lines,” such as bicycles and dishwashers; and five of 16 sporting goods items, according to a sample of imported goods tracked by Telsey Advisory Group, a Wall Street research firm. (…)

Ashley Furniture, the world’s largest furniture manufacturer, plans to raise prices for the majority of its products by 3.5 to 12 per cent starting on Sunday, according to a notice to customers first reported by Home News Now, an industry publication. “The ongoing tariff situation has created significant challenges with cost impacts across our industry,” said the notice from Todd Wanek, chief executive. (…)

Ashley’s notice came before Trump’s announcement this week of a new 25 per cent on upholstered furniture, to take effect on October 14.

At car parts retailer AutoZone, “there probably will be more” price rises as the full impact of tariffs becomes felt, Philip Daniele, chief executive, told analysts late last month. He said many customers would be willing to pay.

“If the starter breaks, your car is not going to start,” Daniele said. Drivers are faced with a choice: “Either bum a ride or get your car fixed or take an Uber,” he added.

Coffee prices have been surging, in part because of 50 per cent duties on Brazil, the world’s largest coffee exporter. Tariffs on imported tin-plate steel has also driven up the price of food cans. (…)

More tariffs to hit:

Invasion of the Killer Ikea Sofas There’s nothing Trump won’t call a ‘national security’ threat to justify a punitive tariff.

The WSJ Editorial Board

(…) The President on Monday announced 10% tariffs on lumber as well as 25% on upholstered wooden furniture, bathroom vanities and kitchen cabinets. This follows last week’s announcement of tariffs on heavy-duty trucks (25%). All of these tariffs are being imposed under Section 232 of the 1962 Trade Expansion Act to—get this—protect national security. (…)

The trouble is that his metal tariffs, which he made even more punitive this year, are hurting U.S. manufacturers of hundreds of products. Furniture manufacturers are having to pay more for imported steel, aluminum, timber and upholstery. Trucking companies are placing fewer orders for new big rigs because of the slowdown in trade. Building permits for new housing units have fallen 11% over the last year, which home builders attribute to tariff uncertainty. That means less demand for kitchen cabinets.

Mr. Trump’s household remedy is always more tariffs to counter the damage from his previous tariffs. So in August he broadened his metal tariffs to include some 400 “derivative” products, including butter knives, spray deodorants and baby strollers.

His Administration has launched sweeping 232 investigations into pharmaceuticals, trucks, timber and lumber, semiconductors, polysilicon and its derivatives, drones, jet engines and more. Mr. Trump’s latest tariffs flow from those investigations. With his trade officials as rubber stamps, there are no imports that Mr. Trump won’t declare a threat to national security.

A Supreme Court decision striking down the IEEPA tariffs is vitally important to the rule of law. But Mr. Trump is showing he will then use Section 232 to damaging effect, much as Joe Biden turned to new authorities to forgive student debt after the Justices blocked his first forgiveness plan. This is another reason for Congress to rein in Section 232.

Bipartisan Senate legislation in 2021 to subject 232 tariffs to Congressional approval had 11 GOP co-sponsors. Republicans in Congress have been reluctant to limit Mr. Trump’s tariff power, or anything else he does for that matter. But they might note that his border taxes are broadly unpopular and could boomerang on the party during the midterm elections.

Software and AI’s contribution would not be enough to keep the economy strong absent a supportive consumer (chart via GaveKal).

Tight correlations. Odds?

Preemptively:

Trump’s Team Hones a New Message Pledging Economic Gains Next Year Advisers work to ease voter anxiety about weak jobs growth and stubborn inflation

Their new mantra: Just wait until next year.

In private conversations with the president, Trump’s advisers, rather than dwell on shaky economic data, have painted a rosy outlook, insisting that data will begin to improve in the first quarter of 2026, according to people familiar with the matter, including senior administration officials. 

(…) advisers told Trump it was up to him how to publicly address the weak jobs data and he could just breeze past the information by pointing to the future, according to a senior administration official. They assured him the economic indicators will show improvements as 2025 comes to a close, the official said. (…)

Public opinion of Trump’s leadership on the economy has turned more negative in recent months. Just 37% of adults polled in September approved of Trump’s handling of the economy, according to an AP-NORC survey, while 62% disapproved. In a recent New York Times survey, 45% of voters said Trump had made the economy worse since taking office, while 32% said he had made it better. (…)

Mid-terms coming rapidly…

• Federal-Worker Buyouts Are Kicking In, Darkening the U.S. Employment Picture About 100,000 federal workers came off the payroll this week, adding strain to an already weakening labor market

The departures coincide with the government shutdown, which could bring another round of cuts.

The trims stem from the Trump administration’s deferred-resignation plan, launched earlier in the year, which allowed staff to leave the government and keep their paychecks and benefits for months. About 154,000 employees took the deal, according to the Office of Personnel Management, and two-thirds were paid through Sept. 30, the end of the fiscal year.

Overall, the administration expects the federal workforce to end the year with hundreds of thousands fewer employees, attributed to a hiring freeze, layoffs and voluntary departures. Trump has also threatened to permanently lay off additional workers in connection with the shutdown, which temporarily furloughs an estimated 750,000 people, according to the nonpartisan Congressional Budget Office. (…)

Though some federal workers in high-demand occupations have gotten jobs quickly, many others face a crowded market and slow searches in a tough white-collar hiring market.

Federal workers’ job applications on Indeed rose 41.2% from January to September, according to the platform. But Frank Grossman, a Philadelphia-based career coach working with federal workers, said many who took the buyout options haven’t looked for jobs in earnest.

“Reality hasn’t hit for a lot of people yet,” he said.

The government shutdown could soon darken the job picture even more. 

Furloughed federal workers may show up as unemployed in the part of the jobs report used to calculate the unemployment rate, Sweet said. Any new layoffs tied to the shutdown combined with the workers who took the deferred resignation program could mean “a hideous employment report could be coming,” he said. (…)

BTW: The nonfarm jobs not report last Friday would not yet have captured those 100k whose last day on the payroll was September 30. The November 7 report (??) would include those 100,000.

BTW #2: Trump last week again floated the idea of sending tariff rebate checks to U.S. Citizens, telling the New York Post that “we’re thinking maybe $1,000 to $2,000 — it would be great.”

Saudi Arabia Takes a Risk in Boosting Oil Production—and Gives Trump a Win Crude prices have fallen this year as Riyadh raises output, but risks abound

Crude prices have fallen this year as a result of what Riyadh has officially cast as routine oil-market management. In reality, strategists say the kingdom is trying to achieve several objectives: claw back market share lost to Brazil, Guyana and U.S. shale producers; rein in members of the cartel it dominates that routinely exceed quotas; and raise cash for massive infrastructure projects now beset by cost overruns and delays.

Whatever Riyadh’s goals, the gambit has benefited the Trump administration. More Saudi crude has helped lower gas prices at the pump, something Trump has repeatedly called for. (…)

Falling oil prices are helping to blunt the inflationary effects of Trump’s tariffs and boost the U.S. economy just as households and businesses grow cautious. Average gas prices were $3.16 a gallon recently, according to AAA, down slightly from a year earlier. (…)

Saudi Arabia can pump crude oil at a cost of less than $10 a barrel, analysts estimate—a huge cost advantage over U.S. shale producers. But the International Monetary Fund estimates the kingdom’s fiscal break-even oil price is $92 a barrel, meaning Saudi Arabia needs to sell oil at that level or higher to bring its fiscal deficit down to zero.

Brent trades around $65 a barrel, down from around $75 at the end of last year, and considerably below the kingdom’s fiscal break-even price. Some think that is still too high. (…)

Despite years of trying to diversify its earnings, the kingdom still derived 53% of revenue from the oil sector in the first half of this year, according to the Saudi Finance Ministry. In the three months through June, total revenue fell 15%, as a 29% plunge in oil revenue wasn’t fully offset by a modest rise in other income.

Riyadh has sold assets and loaded up on debt to ensure it can still fund its spending ambitions. Last year, it sold shares in the crown-jewel oil company, Aramco, and issued $65 billion of debt—up 30% from 2023, according to budget documents. Its Finance Ministry expects public debt to total nearly 32% of gross domestic product by year-end, up from 5.8% a decade earlier.

Bloomberg:

While prices have held up relatively strongly to the supply added so far, there are now signs that the market is starting to shift. Unsold cargoes from the Middle East are accumulating and the futures forward curve is showing signs of near-term weakness. The International Energy Agency anticipates that inventories will pile up rapidly this quarter and that a record surplus will emerge in 2026 as global demand cools and supply across the Americas booms.

Tariffs Threatened to Be a Third Inflation Shock for Europe, But Have Had Little Impact What seemed set to follow Covid-19 and Russia’s invasion of Ukraine as a major inflation shock hasn’t materialized, at least not yet

(…) In a speech in Finland, President Christine Lagarde laid out the ECB’s understanding of what just happened, or didn’t happen. Most importantly, European governments decided not to retaliate when Trump imposed tariffs. If they had, prices of goods imported from the U.S. would have risen, fueling inflation.

The other thing that didn’t happen was a depreciation of the euro. Ahead of their imposition, most economists predicted that the euro would lose ground after tariffs were applied, since the demand for eurozone exports would cool, as would demand for the currency in which they were sold. Instead, the euro has gained significantly since the start of the year.

“All in all, with no retaliation and an appreciating exchange rate, tariffs have had little inflationary impact so far, with their adverse effects mainly limited to growth,” said Lagarde. “Those effects, however, have been relatively moderate thanks to the domestic response.”

Included in that response has been a series of trade deals with economies around the world, most recently with Indonesia. The ECB calculates that deals sealed to date cover 3% of eurozone exports, and those in the pipeline a further 6%. In 2024, 21% of EU exports went to the U.S., and most of those are now subject to higher tariffs.

For Lagarde, EU governments chose not to retaliate against Trump’s tariffs partly because it was more important to them to retain his support for Ukraine in its defense against Russian invasion. And the dollar’s weakness largely reflects doubts about whether the currency “would continue to warrant its status as the ultimate safe-haven currency,” Lagarde said.

In sum, various Trump effects have cancelled each other out as far as inflation in Europe is concerned. (…)

The impact of tariffs on inflation may not be complete.

In particular, Chinese businesses facing high duties in the U.S. could seek new customers in Europe, and lower their prices to acquire them, putting downward pressure on inflation as well as economic growth. At least one ECB rate setter thinks it likely that supply chains will be disrupted, leading to a repeat of the pickup in inflation that accompanied the second year of the Covid-19 pandemic, if on a smaller scale.

But the ECB’s economists reckon either development would have a very modest impact on prices, with inflation in 2027 coming in as high as 2.1% or as low as 1.7%, compared to the 1.9% now forecast.

That is not a rate-changing deviation from the target, and it may take an entirely different shock to really change the outlook for European policy rates.

EARNINGS WATCH

The official Q3 earnings season launches soon but we already have the usual 19 early reporters in:

• 74% beat rate.
• +4.6% surprise factor, including +10.6% for the 6 Consumer Discretionary companies. Their surprise was +5.2% in Q2.
• Earnings up 14.2% on revenues up 7.2%. In Q2: +6.5% and +6.5% respectively.

Ed Yardeni expects Q3 earnings up 10.7% vs consensus at +6.4%.

S&P 500 forward earnings per share for the S&P 500 rose to another new record high during the week of October 2. That puts the forward P/E at 22.7 based on Friday’s close. (The recent downticks in the 2025 and 2026 earnings estimates reflect changes in the constituents of the S&P 500.)

Callum Thomas averages the trailing P/E, forward P/E and the Shiller P/E:

Source:  Topdown Charts Professional

How does the rally compare to history?

Source: @WarrenPies

KKR:

Capital markets in Asia are outperforming, challenging global investors’ assumptions that it’s still all about the U.S.

Indeed, after several years of collective performance that has badly lagged that of the S&P 500, Asia markets certainly have perked up in 2025. Korea’s equity markets have appreciated 59%, China is up 38%, and Japan has risen by 22% in total return USD terms. During this period, the S&P 500 has appreciated 14%, marking the first time it has lagged Asia nine months into the year since 2019.

Such strong performance has caught many allocators by surprise, and many are now wondering whether their large overweight to U.S. assets is still the ‘right’ call. (…)

What’s different now is that structural reforms are taking place in cheap markets, such as Japan and Korea, while a falling dollar is occurring amidst a long-tailed Fed easing cycle. Bottom line: most investors are significantly underweight the region, and the earnings growth rate relative to rest of world is compelling.

Bigger picture, Asia is insulating itself more from Western policy, including trading more with itself. All told, intra-Asia trade rose to 58 percent of regional flows in 2021, compared to 46% in 1990. Importantly, we think that this ratio is headed towards 67% in 2029.

For investors, this means that logistics, manufacturing, and consumer sectors tied to local demand are enjoying better momentum than expected. Moreover, Asia’s 822 million millennials, 6x those of Europe and the U.S. combined,care seeking consumption upgrades as their GDP-per capita ratios increase. India and Vietnam represent prime
examples, we believe.

While history does not always repeat itself, Fed easing cycles are particularly constructive for the region’s performance if there is no U.S. recession (which is our base view). Thus far, this cycle has been no different. Asia typically performs quite well when the Fed eases and there is no recession. We also see local currency gains ahead. Importantly, over time, currency appreciation is typically one third of all EM Equity total return, and this easing cycle is occurring when the U.S. dollar is already expensive.

 

Demographic shifts amidst both young and old are surging. All told, the 65+ age group will be 18% of the Chinese population by 2030; already in Japan 30% of the population is over 65, and in Korea that percentage is 20%.

Not surprisingly, this slowdown in population growth is leading to a surge in productivity-enhancing capex. One can see the surge in software demand in key markets such as Japan. At the other end of the spectrum, our research shows Asia has six times more millennials than the U.S. and Europe combined. For this demographic, consumption upgrades—including savings/brokerage, wellness/healthcare, and leisure—represent major investment themes amid ongoing urbanization. (…)

Within Korea, despite corporate reforms and shareholder activism driving +50% gains so far in 2025, 70% of the market still trades below book value, compared to 40% in Japan and less than seven percent in the U.S (…)

China too is cheap, especially if one compares China AI stories relative to their global counterparts in the U.S. Moreover, the dividend and buyback yield now exceeds the 10-year government bond yield by 1.5-2.0%.

Unfortunately, KKR does not relate P/B with ROEs, a must for a complete assessment of value. Paying 2x book value (equity) when the return on equity is 20% is as good as paying 1x BV when ROE is 10%. How much do you pay per unit of ROE?

Fortunately, Aswath Damodaran, Professor of Finance at the Stern School of Business at New York University computes many country ROEs (though his sample may no exactly match others’). Note that Damodaran shows 2 P/B values, one for “complex” organizations and one for “simple” organizations.

• USA:      15.9%
• India:     15.5%
• Europe: 11.3%
• Japan:      9.9%
• All EM:     9.7%
• China:      8.3%

While investors are enamored with the US, the WSJ informs us that “Nearly 70% of people said they believe the American dream—that if you work hard, you will get ahead—no longer holds true or never did, the highest level in nearly 15 years of surveys.”

Most businesses expect tariff price hikes, KPMG says

Nearly half of big businesses raised prices in the last six months due to tariffs, and a large majority expect to do so in coming months, a new KPMG survey out Thursday finds. (…)

44% of businesses have already increased prices due to tariffs, per the September survey of 300 executives at U.S. companies with more than $1 billion in annual revenue.

• Over the next six months, 42% say they will raise prices as much as 5%.
• Another 29% say they plan to raise prices somewhere from 6% to 15%.

Those price increases are helping with, but not eliminating, the margin compression companies face as their input costs rise.

• Some 39% of businesses have already seen their gross margins decline.
• About two-thirds of respondents say they have already seen sales be deferred or decline outright and hardly any say sales are rising.

Like I wrote yesterday, soft data is getting harder:

Eurozone growth ticks up once again but remains muted

The seasonally adjusted HCOB Eurozone Composite PMI® Output Index increased for the fourth month in a row to 51.2 in September, from 51.0 previously, signalling a further gradual acceleration in output growth across the eurozone private sector. Additionally, the headline measure rose to its highest level since May 2024.

Germany was central to the broader pick-up in growth, with its respective Composite PMI Output Index rising to a 16-month high and indicating a moderate expansion. Nonetheless, out of the euro area nations which Composite data are available for, Spain saw the strongest increase in private sector business activity during September. Moderate growth was registered in Ireland and Italy, making France the outlier across the currency bloc as output shrank at a faster pace than in August.

Albeit rising for a ninth straight month and to the strongest extent in almost a year-and-a-half, the expansion in eurozone output was relatively sluggish, once again coming in below the long-run trend rate of the survey (52.4). Limiting the upturn was a muted improvement in new business. While September’s rise in new order inflows represented the strongest gains in sales volumes for eurozone private sector companies since May 2024, growth was marginal.

Weighing on demand was a decrease in new export orders, stretching the current sequence of contraction in new work from abroad to over three-and-a-half years.

With growth of output surpassing that of new business, September survey data signalled a further reduction in backlogs of work across the euro area. The pace of depletion was the quickest in three months. Clearances of pending projects were achieved despite employment levels decreasing at the end of the third quarter. Notably, this marked the first time since February that workforce numbers have fallen. That said, the extent to which jobs were cut was fractional.

Eurozone companies reported an increase in their operating costs during the latest survey period. However, the rate of inflation slowed and remained below the survey’s historical average. There was likewise a cooling of selling price pressures as output charges increased to the weakest extent since May.

Looking ahead, private sector firms in the euro area were optimistic of growth in business activity over the coming 12 months. In fact, optimism improved on the month and reached its second-highest level since July 2024 (only fractionally surpassed by that seen in June). Nevertheless, expectations were relatively muted by historical standards.

The HCOB Eurozone Services PMI Business Activity Index increased from 50.5 in August to 51.3 in September, signalling faster growth during the closing month of the third quarter. The latest data point marked a fourth consecutive survey period in which the index has posted above 50.0 and therefore in expansion territory.

September saw a pick-up in demand for services which was notable, at least compared to the trend over the previous 12 months. That said, new business growth was mild overall and limited to domestic markets, as indicated by a concurrent (and fractionally faster) reduction in new export orders.

Employment in the service sector was only fractionally up from the level seen in August. This marked the weakest month for the eurozone service sector labour market in over four-and-a-half years when the latest expansionary trend in workforce numbers began. The downward trend in backlogs of work was nevertheless sustained, marking 17 successive months of reductions.

As for prices, inflation ticked lower at the end of the third quarter. Input costs and output prices rose at their slowest rates in two and four months, respectively.

Lastly, service providers maintained a positive assessment of year-ahead activity prospects, with expectations even rising by a solid degree to an 11-month high.

Multinationals race ahead as dollar slump divides US stock market Domestically focused companies lag behind as currency suffers worst year since early 2000s

(…) The US currency is on course for its worst performance in a calendar year in more than two decades, dropping nearly 10 per cent against a basket of major currencies so far in 2025 as Donald Trump’s trade and economic policies cause global investors to rethink their exposure to the world’s largest economy. (…)

A weaker greenback boosts a US company’s foreign earnings in dollar terms, while also making American goods cheaper abroad. Domestically focused companies do not tend to benefit, and those firms that rely on buying goods from overseas in foreign currency face higher input costs.

“Small companies that import goods . . . will suffer and large companies with global reach and capacity to access finance will manage the impact,” said Shahab Jalinoos, head of G10 FX strategy at UBS. (…)

“You hear about currency effects more often when the dollar strengthens and companies blame the strong dollar for losses. But management rarely says ‘we got bailed out by currency effects’.” (…)

“There are a subset of companies that will benefit more than others,” said George Pearkes, a macro strategist at Bespoke Investment Group, who cited tech giants among the businesses in line for a boost from the weaker currency, and utilities and banks among domestic-facing firms that would be hurt by it. (…)

GIVE THEM CREDIT

Jim Chanos slams ‘magical machine’ of private credit after First Brands collapse Investor famed for spotting Enron fraud sounds alarm on Wall Street’s booming debt machine

Jim Chanos, one of Wall Street’s best-known short sellers, has sounded the alarm on the private debt boom, telling the Financial Times that First Brands Group’s chaotic bankruptcy could augur a wave of corporate collapses.

Some of the biggest names on Wall Street are facing the prospect of multibillion-dollar losses from the bankruptcy of First Brands, a heavily indebted maker of spark plugs and windscreen wipers based in Ohio.

First Brands has now disclosed almost $12bn in debt and off-balance sheet financing built up in the years before its Sunday bankruptcy filing, which also ensnared less well-known private lenders such as a Utah-based leasing specialist. (…)

The FT has previously reported that the group’s founder and owner, low-profile businessman Patrick James, was previously sued by two lenders that alleged that fraudulent conduct had exacerbated their losses. James strongly denied the allegations of fraud in the two cases, which were both dismissed after settlements were reached. (…)

“With the advent of private credit . . . institutions [are] putting money into this magical machine that gives you equity rates of return for senior debt exposure,” he said, adding that these high yields for seemingly safe investments “should be the first red flag”. (…)

Chanos said: “We rarely get to see how the sausage is made.”

First Brands’ bankruptcy has revealed that James controlled both the auto parts conglomerate and some of its off-balance sheet SPEs through the same chain of limited liability corporations. Chanos described this common ownership as a “huge red flag”. (…)

First Brands’ financial statements were not publicly available. While hundreds of managers of so-called collateralised loan obligations had access to its financial disclosure, they had to consent to non-disclosure agreements to receive the documents.

“The opaqueness is part of the process,” Chanos said. “That’s a feature not a bug.”

Any resemblance from the above to the below is your own imagination.

Everything’s bigger in Texas, data center edition: behold the blockbuster debut of Fermi, Inc. (FRMI on the Nasdaq), with shares enjoying a 55% rip yesterday to leave the nine-month-old firm with a $19 billion market capitalization. 

Fermi, which counts former Texas governor turned Trump 1.0-era energy secretary Rick Perry among its cofounders, plans to construct the world’s largest energy and data facility, which could generate 11 gigawatts of energy – twice that currently serving New York City – by 2038 per CEO Toby Neugebauer.  

Tenant revenues are unlikely to take shape prior to 2027 according to the prospectus, a noteworthy detail considering the firm is structured as a real estate investment trust, which must earmark 90% of taxable income towards shareholder dividends. Neugebauer told the Financial Times that Fermi has snagged a deal with “one of the most valuable and respected technology companies on the planet.”

In any event, Wednesday’s closing price confers a $6 billion paper windfall on Neugebauer, the son of former Texas congressman Randy Neugebauer and who previously helmed the ill-fated, “anti-woke” banking startup GloriFi, which filed for Chapter 7 liquidation in 2023 alongside a torrent of investor litigation. (ADG)

Also from ADG:

• The firm [OpenAi] projects $20 billion in annual recurring revenue by year-end but also pegs cumulative cash burn at $115 billion through 2029, an increase of $80 billion from its first quarter forecast.
• Meta’s capital expenditures are set to vault to $97 billion next year from $37 billion in 2024 if the sell-side consensus proves accurate, with free cash flow poised to drop to $28 billion, half that achieved last year. Notably, those outlays do not include the monster four million square foot Hyperion data center, which Meta will occupy under a 20-year lease. A Pimco-led $26 billion debt financing will underpin the project, which is structured as a joint venture and remains off the social media giant’s books. Out of sight, out of mind? Not quite, according to a Sept. 5 Bloomberg bulletin: “If [Meta]  decides to terminate the lease early or opts to not renew it and the value of the data center falls below a pre-determined threshold, [Meta] will reimburse investors for potential losses.”

Goldman Sachs:

Since the rise of the AI theme in 2022, most capex at large tech firms has been financed out of the substantial cash reserves on their balance sheets. Over the past few quarters, the tide appears to have shifted, with debt capital markets playing an increasingly important role.

This shift is evidence across many corners of credit markets—from the ABS market, where issuance of data center deals has now reached $20 billion since the start of 2024, to both pubic and private corporate credit markets, as well as bilateral vendor financing agreements.

Mapping the equities in the GS TMT AI basket, which tracks equities that are either pursuing artificial intelligence or can help enable the technology, we find these AI-related issuers have accounted for $141 billion in corporate credit issuance in 2025 to-date, eclipsing full-year 2024 gross supply of $127 billion. Tech issuers in this basket have accounted for the lion’s share of this supply at $86 billion, followed by Utilities at $51 billion.

We think this trend will likely extend for two reasons.

First, cash balances among large tech firms have substantially declined to levels that are almost in-line with the median non-financial IG issuer.

Second, the appetite for spending remains strong, with capex growth anticipated to reach a solid 50% on a year-over-year basis, through 2025.

The read-through for credit markets is, on the margin, negative, in our view. While not yet a cause for alarm, given both the high cashflow generation and low leverage among large tech companies, the shifting funding mix of capex beyond cash is worth monitoring.

This is arguably late cycle… and the Fed is loosening…meaning reducing the cost of capital, not only for banks like in the good not-so-old days, but to all capital providers.

But credit markets are already very loose and risk averse as the Bloomberg Financial Conditions Index, which measures the availability of capital across a broad range of markets, illustrates:

Rich Bernstein’s RBA:

Besides easy financial conditions, there are other factors that might question why the Fed feels the need to cut rates: 1) the economy is healthy, 2) inflation expectations are rising, 3) trade agreements have resulted in supply chain shocks, and 4) immigration restrictions are limiting labor supply.

In addition, the Fed doesn’t appear to fully recognize that ongoing deglobalization and financial bubbles are both inherently inflationary.

Regardless of what the Fed should or should not do, they have cut rates and are signaling their intent to cut rates further. We think there could be two potential financial market outcomes.

First, the response to the Fed cutting rates could be a broadening of the equity markets. That would be a very healthy outcome because a broader stock market would imply the Fed has reignited a healthy lending cycle, which in turn would spur stronger profits and economic cycles.

The second response could be the Fed rate cuts simply result in more excess liquidity and more speculation. With existing easy financial conditions, investors might use the added liquidity to further speculate. This could ultimately foster a very bad outcome.

We have repeatedly emphasized over the past 30 years that bubbles are inherently inflationary because they grossly misallocate capital within an economy. In other words, capital flows to things not needed in the economy, while truly necessary investment goes ignored.

During the Technology Bubble, we argued that energy was the sector being starved of capital despite the massive need for investment. The bubble’s misallocation of capital led Energy to be the best performing sector during the 2000s, and the US CPI peaked at 5.6% before the global financial crisis destroyed economic growth and inflation fell.

There is a similar misallocation of capital within the US economy today. Simply put, imagine if all the capital going into cryptocurrencies instead was invested in the US electric grid. We strongly doubt electricity prices would be rising more than 6% per year as they currently are if that had been the case.

So, investors need to carefully watch the Fed and the markets’ responses to their actions:

1. The possibility that inflation isn’t dead and employment isn’t waning. The Fed might have to go on hold or even reverse course and raise rates. This is the worst case scenario for financial markets fueled by liquidity and speculation, but might be good for the relative performance of value, dividends, non-technology quality, and more broadly diversified portfolios.

2. The possibility that employment is much worse than expected and a series of large rate cuts ensue. This isn’t a particularly good scenario either because it implies the economy and earnings are demonstrably weaker than consensus forecasts. Defensive sectors would likely outperform in this environment.

3. The Fed’s rate cuts are very timely, and the economy reaccelerates without much inflation. This would result in a broadening of the market in a very healthy way.

4. The Fed adds unnecessary liquidity to the financial markets and speculation runs rampant. This might be fun for some investors in the short-term, but it could create serious misallocations within the economy and add to significant future inflation.