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Decades high real price of copper posing physical challenge to investment boom

Michael J. Moran

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The US trade balance improved slightly in June, as a drop in imports exceeded a dip in exports. The declines represented partial offsets to strong performances in the early months of the year. Exports posted average monthly gains of 3.6% (not annualized) in the first four months of 2026 before giving back a good portion of the gains in May and June (off 3.2% and 0.9%, respectively). Imports rose an average of 2.8% per month from February to May, with these gains sandwiched between drops of 2.0% in January and 1.8% in June.

The ups and downs in exports and imports have left a largely flat trend in the US trade balance, with the monthly deficit in line with the results seen before the tariff-induced noise in 2025. However, results this year have moved within a noticeably wider range, suggesting that the frequently changing tariff regime is generating noise in the monthly trade flows.

The breakdown of trade flows between goods and services reinforces the view that markets have not settled into an equilibrium in a world of higher US tariffs. Exports and imports of services (generally not subject to tariffs) have changed modestly and moved along generally smooth paths. Exports and imports of goods, in contrast, have shown sizeable monthly changes (charts below).

The effect of international trade on US GDP growth in the past year has resembled the flat trend in the trade deficit. Net exports have made no net contribution to GDP growth in the past four quarters, but the quarterly results have ranged from a contribution of 1.6 percentage points in 2025-Q3 to -1.0 percentage point in 2026-Q2 (and contributions of -0.2 percentage point in 2025-Q4 and -0.4 percentage point in 2026-Q1).

The international trade data can be found in Haver’s **USECON** database. Detailed figures on international trade are available in the **USINT** and **USTRADE** databases. The expectations figures are from the Action Economics Forecast Survey in **AS1REPNA**.

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- Both exports and imports cool after strong performances in early 2026.
- The US trade balance is moving sideways within a wide range.

US International Trade in June: Searching for Normal

Robert Brusca

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Swiss HICP inflation in July was zero month-to-month. In June, it was zero month-to-month. In May, it was 0.1% month-to-month. Year-over-year HICP inflation is 0.7%, compared to a year ago when it was 0.1% over 12 months.

The same metrics viewed through the domestic measure of Swiss inflation are even lower. In July, domestic prices rose 0.1%; in June, they fell by 0.1%; and in May, they were unchanged. The 12-month inflation rate for the Swiss CPI in July was 0.4%; a year ago the 12-month change was 0.2%. Pinch me! Am I dreaming?

And yes, Switzerland is on the same planet as the United States, Europe, and the United Kingdom.

Swiss inflation going back to 2020 has a peak year-over-year rate in its core of 2% based on monthly data. The headline 12-month rate at its peak was 3.4%. Excluding administered prices, the peak inflation rate in Switzerland was 2.7%. One of the main things that Switzerland has going forward is that the Swiss National Bank (SNB) has incredible credibility. It waited as long as the Fed did to raise interest rates, but it raised rates quickly up to the level of the core inflation rate. Once inflation began to fall, the SNB continued to raise rates until it became clear that the policy rate had begun to hover above the inflation rate. At that point, the bank flattened out its rate profile, then turned into a rate-cutting mode.

Once again after the inflation rate had been arrested and fell below 1%, the SNB continued to cut rates until inflation was at zero and so were rates.

The U.S. has not had the same experience with inflation. U.S. inflation has lingered and the Federal Reserve has continued to hold its policy rate above the 12-month trailing inflation rate.

Swiss performance is unique, suggesting that monetary policy right now is not needed to control inflation, at least not in Switzerland. But this undoubtedly has a lot to do with expectations about the behavior of the SNB and the dynamics of the Swiss economy and capital markets.

Swiss inflation began to track the 1% mark in early 2024. The core rate fell into line at the same time, with very little lag. This also is very unlike the U.S. experience.

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The Federal Reserve likes to tout its credibility. However, it's hard to see a central bank crowing about its credibility when it's missing its inflation target for five years; it continues to miss its inflation target as it observes inflation is still stubborn and possibly accelerating, and yet doing nothing about it.

The Federal Reserve makes policy in a way that is deeply rooted in the concepts of modern neo-Keynesian theory, policies that have completely embraced to the point of smothering the concept that expectations matter. Treasury Secretary Bessent has authored an article in _The International Economy_ magazine entitled “The Fed’s ‘Gain of Function’ Monetary Policy” in which he is critical of this idea that by talking to markets the Fed can change expectations and control inflation. While this is a precept of modern monetary economics, it only works if the central bank is as good as its word and the Fed has been far from that. So, it's unclear how a central bank, with an inflation target that it is (or has been) ambivalent about hitting, carries the credibility to hit it in the future when it's only willing to put forth a de minimis effort.

Switzerland is an example of how well monetary policy can work and how well expectations can work when the central bank really has credibility. The Federal Reserve knows how important credibility is and so it tries to assert that it has it. However, credibility is not the kind of thing that you can assert. It's the kind of thing that a central bank has to earn. When Powell was Fed Chair, he tried to harken back to the days of Paul Volcker and say, “see what we can do.” However, it was clear to everyone that Powell was not Volcker, and he was unwilling to do any of the things that Volcker did.

As that played out, Powell eventually took this system of inflation targeting that Bernanke had put in place and turned it into a system of unemployment rate targeting and began a process of missing the inflation target for five years running. At some point, the Fed pays the price for that, and the price it pays is an erosion of its credibility. But that is something the Fed is never going to admit that it has lost. Switzerland is the perfect example of what it looks like when a central bank has that credibility. Monetary policy works much better and is almost effortless.

Switzerland

Swiss Inflation: Nonexistent; Switzerland: Existent!

Winnie Tapasanun

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The ISM U.S. manufacturing PMI rose to a higher-than-expected 55.6 in July following a 0.7-point decline to 53.3 in June, according to data from the Institute for Supply Management. The July reading, above the 50 expansion-contraction threshold, indicated the U.S. manufacturing sector expanded for the seventh consecutive month and at the fastest pace since May 2022. A reading of 53.8 for July had been expected in the Action Economics Forecast Survey. The latest manufacturing PMI, while above a contraction-level 48.4 in July 2025 and a low of 47.0 in October 2024, remained below a peak of 63.8 in March 2021.

The production index rebounded to 58.5 in July from 52.2 in June, indicating production expanded for the ninth straight month and at the strongest pace since November 2021. The index was above a low of 44.8 in April 2025 but below a peak of 66.5 in March 2021. In July, 25.1% (NSA) of respondents reported higher production while 10.4% reported lower production. The new orders index increased to 56.7 in July from 56.0 in June, signaling new orders grew for the seventh consecutive month following four successive months of contraction. The index remained well above a low of 41.8 in January 2023 but below a high of 67.0 in May 2021. In July, 25.6% (NSA) of respondents reported higher new orders while 14.2% reported declines. The inventories index slipped to 51.2 in July from 51.4 in June, marking the second month of expansion following 13 months of contraction. The index was slightly below a high of 52.7 in March 2025 but above a low of 43.8 in October 2024. Meanwhile, the supplier deliveries index rose to 58.9 in July from 57.4 in June, indicating slowing delivery performance for the eighth straight month after faster deliveries in November 2025. In July, 21.3% (NSA) of respondents reported slower delivery speeds while 3.5% reported faster speeds.

On the labor front, the employment index advanced to 52.8 in July from 49.7 in June, showing employment expanded for the first time since September 2023 and at the highest level since August 2022. The index was above a low of 44.1 in November 2025 but below a high of 56.5 in March 2022. In July, 16.3% (NSA) of respondents reported higher employment while 13.3% reported lower hiring.

On the pricing front, the prices paid index declined to a still-high 71.1 (NSA) in July following a 9.1-point drop to 73.0 in June, indicating raw materials prices rose for the 22nd consecutive month but at the slowest rising pace since February. The index remained well above a low of 39.4 in December 2022 but below a high of 87.1 in March 2022 and a peak of 92.1 in June 2021. In July, 50.2% (NSA) of respondents reported higher prices while 8.1% reported price declines.

In other ISM series not included in the composite index, the new export orders index rebounded to 53.0 in July from 48.5 in June, indicating new export orders grew for the second time in three months and at the highest level since March 2022. The index was up from a low of 40.1 in May 2025 but down from a peak of 57.1 in February 2022. The imports index climbed to 55.7 in July from 52.9 in June, suggesting imports expanded for the sixth successive month and at the strongest rate since June 2021. The index was above a low of 39.9 in May 2025 but below a peak of 61.0 in June 2021. The order backlog index increased to 55.0 (NSA) in July from 50.5 in June, showing backlog levels grew for the seventh straight month and at the fastest pace since February. The index was below a high of 56.6 in February and a peak of 70.6 in May 2021 but well above a low of 37.5 in May 2023.

The ISM figures are based on responses from over 400 purchasing and supply executives from 18 industries, which are weighted according to each industry’s contribution to GDP. These data are diffusion indexes where a reading above 50 indicates expansion; below 50 indicates contraction. The ISM Manufacturing PMI is a composite index based on the diffusion indexes of five of the indexes (seasonally adjusted) with equal weights: New Orders, Production, Employment, Supplier Deliveries, and Inventories. The figures from the Institute for Supply Management can be found in Haver’s **USECON** database; further detail is found in the **SURVEYS** database. The expectations number is available in Haver’s **AS1REPNA** database.

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- ISM Mfg. PMI up to 55.6 in July; seventh straight month above 50.
- Production (58.5) reaches highest level since Nov. ’21 and expands for the ninth consecutive mth.; new orders (56.7) for the seventh successive mth.
- Employment (52.8) above 50 for the first time since Sept. ’23; at highest level since Aug. ’22.
- Prices Index (71.1) at a five-month low, still indicating prices rising for the 22nd straight mth.
- Exports (53.0) highest since Mar. ’22; imports (55.7) highest since June ’21.

U.S. ISM Manufacturing PMI at Highest Level Since May ’22; New Orders, Production, and Employment Growing

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The S&P manufacturing PMIs for July show a group of 17 countries plus an aggregate for the European Monetary Union. Across these 18 observations, there is broad, but uneven, improvement on a month-to-month basis.

The median reading for July increases slightly to 51.9, a gain of 0.5 diffusion points on a month-to-month basis.

44.4% of reporters are improving on a month-to-month basis. Measured over three months compared to six months, 33.3% are improving; over six months compared to 12 months, 66.7% are improving; and over 12 months compared to 12 months ago, 83.3% are improving. Despite the monthly statistics showing a mixed performance and evidence of some soft spots, the general trend for manufacturing is to show that improvement is in place.

The percentile standing for the July diffusion indexes on data back to 2021 shows an average standing of the 69th percentile across the 19 reporters. That means since 2021 the observations have generally been stronger than this only about 30% of the time, marking this as an ongoing improving situation for manufacturing.

The reporting countries with percentile standings below their medians (below a 50% standing on a queue basis) are China, Russia, India, Brazil, Indonesia, and Turkey.

The strongest countries on a queue percentile standing basis are Japan with a 91.0 percentile standing and Mexico with an 88.1 percentile standing. In addition, South Korea has an 85.1 percentile standing and Malaysia has an 83.6 percentile standing.

At the bottom of the table, we have groupings of countries by various areas or characteristics. The developed group—which includes the United States, the United Kingdom, the European Monetary Union, Canada, and Japan—has an average queue standing in its 72.5 percentile. The BRIC countries have a standing in their 21.6 percentile and the average for Asia is in its 64.7 percentile. While the BRIC countries are lagging, generally speaking they had been performing better during the past; as of July, China has a diffusion reading for its manufacturing sector at 49.2, Brazil at 47.5, Russia at 50.7, and India at 53.5. The BRICs generate a low percentile standing, but their July diffusion readings are more centrist than the rankings might seem to imply.

This report shows manufacturing engaged in some amount of recovery. However, there's still a lot of unevenness in the global economy, still a lot of work left to do, and still a lot of geopolitical risks in play.

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S&P Global Manufacturing PMIs Are Mixed But Improved

Tian Yong Woon

In this week's Letter, we dive into the latest Blue Chip Financial Forecast (BCFF) survey results in light of key developments around Asia and the broader world economy. We find that, despite the recent flare-up in US-Iran tensions, panellist expectations for policy rates remain little changed, bar the US (chart 1). Central banks are still seen as likely to continue diverging significantly across regions in response to the volatility in global oil prices (chart 2). The latest on the US-Iran conflict brings hopes of another deal on the horizon, as part of a broad on-again, off-again pattern. Those hopes have sent crude oil prices lower, albeit with flows through the Strait of Hormuz remaining at a trickle (chart 3). As global oil supply remains constrained, one key area to watch is Chinese crude oil imports (chart 4), which have slumped since the conflict broke out. There is no telling when Chinese buying will recover, if ever, and if so, by how much. Moving to Japan, and taking these developments into account, the Bank of Japan held its policy rate steady at its recent meeting. Inflation risk is still flagged as being tied to the upside (chart 5). That may threaten to upend real wage gains this year, should a price flare-up materialise extensively enough. Yen intervention talk has also returned to the fore, with the US and Japan confirming recent intervention moves. Both have signalled that more may come if needed, although the yen remains squarely within its longer-term weakening trend (chart 6).
 
**Blue Chip Financial Forecasts**
Last week, we published the August 2026 Blue Chip Financial Forecast survey results. Despite the flurry of recent headline developments around the world, we found panellist expectations only modestly changed from last month. In particular, views of 12-month ahead policy rates were little changed or unchanged for every economy bar the US (chart 1). US expectations now point to slightly higher policy rates than a month ago. Among the economies covered by the survey, the highest expected 12-month ahead policy rates still relate to Australia, followed by the US and the UK. At the other end, the lowest expected rates relate to Japan and Switzerland. The slightly higher expected US policy rate may well incorporate, among other factors, the recent re-escalation in US-Iran tensions and the inclinations of new Fed Chair Warsh. We return to those tensions in a later section below.

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Touching further on the recent oil price volatility, the survey also gauged how panellists expect central banks to respond. Half of panellists (50%) thought no generalisation was possible, since central bank responses are likely to continue diverging significantly across regions. A sizeable minority (30%), however, expected central banks to stay on hold for longer until underlying trends become clearer. The US-Iran MoU has recently broken down, with an associated rebound in energy prices. Even so, most panellists (55%) reported no change this month in how they assess the balance of risks between employment and inflation. In both the US and the rest of the world, a majority saw upside risks to inflation as the greater concern (US: 67%; ex-US: 60%). Only a small minority pointed to downside risks to employment (US: 10%; ex-US: 12%), with the remaining 25% or so viewing the risks as broadly balanced.

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**Energy**
Digging deeper into the Strait of Hormuz situation, the latest position at the time of writing is that the US is holding off additional military strikes on Iran. A deal on the Strait with Iran is reportedly close, with negotiations set to resume today. All of these developments came after the latest BCFF survey period. In the meantime, US-Iran hostilities have been on-again, off-again, and with them the accessibility of the crucial Strait as a trade waterway. That pattern has left crude oil prices whipsawing of late (chart 3), underscoring how fluid the Middle East situation remains. Beneath all the oil price movements, shipping flows remain reduced to a trickle, a small fraction of pre-conflict levels.

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Against this backdrop one key factor worth some discussion is China's crude oil imports. These slumped following the outbreak of the conflict, though part of that slump may have been involuntary, with the Strait closure limiting available supply. An animated map tracks the evolution of Chinese crude imports over time (chart 4). Among other things, it shows the slump in recent months, denoted by the fading red shading over China. It also shows the rise of Russia as a key source of imports over the past decades. More recently, Brazil has risen as a source, as supplies through the Strait of Hormuz, and by extension from much of the Middle East, got choked off. It remains to be seen whether Chinese imports will recover any time soon, and if so, by how much. There is also an interplay between crude oil prices, Chinese importers' sensitivity to those prices, and eventual Chinese imports.

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**Japan**
Moving to Japan, and taking the above developments into account, we also saw last week that the Bank of Japan (BoJ) held its policy rate at 1% (chart 5). The hold came with some warnings about the possible rate of future inflation, leading some investors to infer that another policy rate hike may well be on the horizon. Specifically, the BoJ warned in its updated outlook report that underlying CPI inflation risks deviating above the price stability target of 2%. The central bank's updated forecasts echo that sentiment, with CPI inflation less fresh food now seen at 2.5% for fiscal 2026, albeit down from 2.8% in April. CPI inflation less fresh food and energy is also seen at 2.5% for fiscal 2026, slightly down from 2.6%. However, another positive development has taken place despite the latent upside risks to inflation, in the form of wages. Real wages have grown consistently this year, although that may be upended if the inflation rate accelerates to outpace wage growth.

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Last but not least is the recent talk about intervention in the Japanese yen market. Japan's Ministry of Finance, in a rare admission, confirmed earlier today that Japan and the US jointly conducted yen intervention to support the currency on Friday. The ministry added that the two countries will not hesitate to jointly intervene again. Additionally, US Treasury Secretary Bessent said the US will consider increasing the size of the Fed's Foreign and International Monetary Authorities (FIMA) repo facility in coming months. The facility provides temporary dollar liquidity, allowing Japan to raise dollars without outright sales of US Treasuries and easing funding pressures for intervention needs. As shown on chart 6, the yen has embarked on a depreciating trend since early 2025 against a basket of trading partner currencies. That weakening has come even despite a broad narrowing of policy yield differentials between the BoJ and its major central bank peers. The BoJ has persisted with gradual rate hikes, whilst major peers mostly stood pat.

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Asia

Economic Letter from Asia: On Again, Off Again

Jonathan Basile

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The U.S. Employment Cost Index (ECI) expanded at a steady 0.9% rate in the three months ended June, the same quarterly pace as in the first quarter. On a year-over-year (YoY) basis, compensation costs have been running at the same 3.4% figure for three consecutive quarters. This kind of three-quarter stability is unusual for a cyclical indicator, happening just 5% of the time since the 1982 inception of the series. A deeper dive beneath the headline number reveals opposing paths for wages and benefits.

There is a trend divergence between ECI: Wages and Salaries and ECI: Benefits for all civilian workers. The former eased to 3.2% YoY in 2026’s second quarter, the lowest reading in five years. The latter advanced at a 3.8% YoY rate, the highest in five quarters. Moreover, the Bureau of Labor Statistics’ (BLS) unpublished Health Benefits for Private Industry, a subset of ECI benefits, expanded at a much swifter 6.0% YoY. The combination of higher benefit inflation and slower wage inflation implies an environment that is not favorable for corporate profits.

The picture for the private sector is similar to that for all civilian workers, with one difference. Private ECI: Compensation costs are not steady, they are, instead, decelerating. In the second quarter, Private ECI: Compensation downshifted to a 3.3% YoY figure, the lowest since 2021’s second quarter. Private ECI: Wages and Salaries came in at a 3.1% YoY rate, the weakest since 2021’s first quarter. Private ECI: Benefits advanced to 3.8% YoY, the strongest since 2023’s third quarter.

The spread between Private ECI: Wages and Private ECI: Benefits illustrates private sector profit pressure. In the second quarter, the -0.7% spread was the lowest in 14 years. Benefit costs are determined by market forces and are an expense beyond any private companies’ control. Wages and salaries, on the other hand, are an important line item completely under the purview of C-suite executives. The easing in private wage pressures suggests that firms are opting to trim one cost at the expense of another. From private workers’ perspective, the higher benefit/lower wage growth results in faster growth for paychecks, but slower growth for take-home pay.

The BLS report also has an alternative way to observe oscillating pressures on consumer purchasing power with “real” inflation-adjusted measures. To that end, consumers’ purchasing power loss in 2026’s second quarter, measured by the Real ECI: Wages and Salaries, amounted to a -0.3% YoY decline. This was the weakest since 2022’s fourth quarter. However, outside the pandemic-disruption period, this compression was the worst in 14 years. 

Lack of forward momentum from the Real ECI: Wages and Salaries fundamentally does not support an accelerating profile for Real Consumer Spending over the near term. Special factors that supported second quarter consumer spending, like the World Cup, also should dissipate as the summer quarter unfolds.

The disinflationary takeaway from the nominal and real wage picture for household income supports the Fed’s inaction to hold rates steady at the July 29 FOMC meeting. The combination of higher benefit/lower wage growth generating a profit squeeze is another disinflationary takeaway for corporate income that sides with the Fed doves.

The employment cost index measures the change in the cost of labor, free from the influence of employment shifts across occupations and industries. It is provided by the Bureau of Labor Statistics and is available in Haver’s **USECON** database. Consensus estimates from the Action Economics Forecast Survey are in Haver’s **AS1REPNA** database.

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- Compensation growth was steady.
- But faster benefit growth is not favorable for profits.
- Slower wage growth is employers' reaction.

Steady Employment Cost Index Reveals Divergent Wages and Benefits

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The harmonized index of consumer prices (HICP) for the European Monetary Union (EMU) surged in July, rising by 0.5% after having sagged in June with a -0.1% month-to-month change. The ceasefire that had temporarily been arranged with Iran in June has given way to the reality of ongoing war and ongoing strikes against tanker traffic. While there are some ongoing talks among the combatants, there is not a lot of hope for another ceasefire that's going to last. Both the United States and Iran have their own particular needs to have a ceasefire. But Iran took the last ceasefire as an opportunity to rebuild, recalibrate, apparently strengthen its military capabilities, and then extend its demands for control of the Strait of Hormuz. These were all nonstarters from the U.S. perspective, and I presume from a global perspective as well. The conditions necessary to underpin a ceasefire with some staying power simply do not exist anymore. The U.S. has resorted to hitting Iran harder.

As a result, energy prices have moved back up and inflation in July moved back up in the EMU. Inflation shows a 2.9% rise over 12 months, a 4.1% annual rate of increase over six months, and a 2.6% annual rate of increase over three months. All of these are excessive with respect to the ECB objectives.

Over six months inflation is excessive in the EMU and in its four largest economies: Germany, France, Italy, and Spain. The best (the lowest) inflation performance is in Germany at 3%, while the worst inflation performance is in Italy at 5.2%. These four countries all exceed the ECB’s desired pace of 2% over 12 months as well. Twelve-month Spanish inflation runs at 3.8%, while in France inflation nails down the low side at 2.3%. Over three months, conditions are more varied because we're mixing in this one-month period of very good inflation news with two months of not so good inflation news. Over three months, Spain still logs a 4.4% increase in its HICP at an annual rate, but France logs 1.2% and Italy logs 1.6%; Germany's pace comes in at 2.8%.

We have core inflation or inflation excluding energy metrics (ex-energy in the case of Germany) for three of the four large countries. These metrics for July ranged from a 0.2% increase month-to-month in Germany to a 0.4% increase in core inflation in Italy. The ex-energy or core measures are within reach of the ECB’s target when applied to the core on a country basis. For Germany, the pace is 2.2% over 12 months, on the low side; for Italy, it’s at 1.6%. But excessive inflation persists for Spain where the core measure is at 3%. Over six months, results are highly similar to what we see over 12 months, but over three months we see German inflation at 2.3%, Italy at 2.4%, and Spain at 3.1%. All of these core or ex-energy measures become uncomfortable over three months.

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It's clear that the situations in the Middle East—including Iran pressuring traffic through the Strait of Hormuz as well as the crimping of the flows into the Red Sea toward the Suez Canal by the Houthis—are contributing to these uncertainties and to the high short-term inflation rates.

We're talking about central banks now managing shocks, not about creating expectations involving macroeconomic developments. Policymaking has clearly transitioned into a different kind of world where central banks are onlookers and have no way of anticipating, and therefore no way of guiding investors over what to expect in the future because nobody knows.

This state of uncertainty is uncomfortable, but markets can deal with it, and the economies have so far been able to manage it. Although it's not quite the same kind of disruption, the global economy has been dealing with the uncertainties from the Russian attack in Ukraine for quite a bit longer. Currently, that conflict is beginning to turn more in favor of Ukraine as it has discovered a way to strike Russia internally and disrupt its oil production. The beat goes on as the uncertainty ramps up.

Despite the devastation rained on Iran in the attacks from the United States and Israel, Iran continues to surprise with an ability to mount counterattacks in the Strait of Hormuz. It is a fragile enough and an important enough waterway that it has been able to be disrupted by Iran with its remaining missiles and drone resources. All of this simply makes the future much more difficult to assess because it sets the bar extremely high for the kind of dominance the U.S. needs to achieve in order to open the Strait of Hormuz wide with no risk of attack. For now, that objective is a bridge too far. Despite everything the U.S. has done, it still hasn't done enough.

Europe

EMU HICP Flares After Sag

Andrew Cates

**The Fed stays its hand**
With US inflation still running above target and the economy expanding at a solid pace, the case for a further hold commanded a clear majority — but not the whole committee. The decision to stand pat for a fifth straight meeting drew three dissents, from members who wanted to raise rates without further delay: a rare and public split, and the sharpest the committee’s new leadership has yet faced. The futures market, by contrast, had been far less conflicted. A hold was the firm favourite going in, with only about a one-in-three chance of a hike attached, so the outcome itself surprised few. Where the real uncertainty now lies is in the path beyond this meeting. The rates implied by the September, December and March contracts no longer describe an easing cycle at all; if anything they lean towards further tightening, with a move as soon as September now a live possibility — a marked change from the cuts that had been priced earlier in the year. Tellingly, the statement accompanying the decision singled out strong capital investment and productivity growth, the very forces that run through the rest of this week’s charts.

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**Expensive money, for the right reasons**
If official rates are going nowhere fast, the same cannot be said of the real cost of long-term capital. The US 10-year inflation-protected yield has risen to around its highest in twenty years, and the timing is instructive: it has moved closely with the Citigroup economic surprise index, climbing as incoming data have repeatedly beaten expectations. That distinction matters. A real yield rising because the economy keeps surprising to the upside is a very different thing from one pushed higher by, say, fiscal policy scares. It potentially points instead to genuine strength in the demand for capital — and, as the charts that follow suggest, to an investment cycle that is beginning to turn.

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**A recovery led from the factory floor**
The composition of the July flash surveys is as notable as their level. As chart 3 below suggests, in most of the major economies the manufacturing reading now sits above that for services — the points falling below the diagonal — reversing the pattern of much of the post-pandemic period, when services did the heavy lifting. A manufacturing-led upturn is characteristic of an investment cycle rather than a consumption one, and it fits the wider picture: it is firms, not households, that are stepping up their spending, whether on artificial intelligence, electrification, defence or the reshoring of supply chains.

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**Orders confirm the turn**
Survey balances are one thing; hard orders are another, and they are pointing the same way. A composite of manufacturing new orders across the United States, Japan, Germany and Canada has turned firmly higher, corroborating the message of the flash surveys. The strength is genuine, though it warrants a caveat. Some of it reflects lumpy and volatile items, Japanese machinery orders among them, and much of the wider investment surge is defensive as much as productive, directed at security and resilience rather than at raising the economy’s productive capacity. Whether it ultimately pays off will turn on that distinction — and on whether it is funded out of profits or increasingly out of borrowing.

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**Markets at ease with higher rates**
Equities, remarkably, have taken all of this in their stride, holding near record highs even as real yields have climbed. The reason can be read in the way assets move together. The correlations that broke down in 2022, when rising real yields hit shares and bonds alike and government bonds ceased to hedge equity risk, have since reverted to something closer to their historical norm. That normalisation is the mark of a market persuaded that higher rates reflect stronger growth rather than an inflation problem. It is a coherent view, and may prove right; but it rests on the assumption that the investment now under way delivers the productivity gains its champions promise. This week’s rotation out of the artificial-intelligence winners, and the sharp fall in chip stocks led by South Korea, show how quickly that assumption can be called into question.

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**The constraint beneath the boom**
For all the enthusiasm about capital spending, the boom is running into a physical wall, and nowhere is that clearer than at sea. Rebased to their 2024 average, Baltic freight rates tell a strikingly selective story. Since the breakdown of the US–Iran understanding and the associated escalation in the Middle East, the cost of shipping crude oil, refined products and gas has surged, while dry-bulk rates — grain, iron ore, coal — have barely moved. This is not a broad freight boom but a targeted repricing of the risk to the world’s energy arteries, above all the Strait of Hormuz. It is a fitting coda to the week: an investment cycle straining against the availability, and the security, of the energy and resources on which it ultimately depends.

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The Federal Reserve left its policy rate unchanged at the conclusion of last night’s meeting, a decision that had been widely expected — the futures market went in pricing only around a one-in-three chance of a hike — but one that split the committee unusually sharply, with three of its members dissenting in favour of an increase to counter inflation that has now run above target for more than five years (chart 1). Yet whatever the near-term path of official rates, the real cost of capital has already moved decisively. The real ten-year yield has climbed to around its highest in two decades, and it has done so in step with a run of firmer-than-expected economic data (chart 2). Behind that resilience lies an investment cycle that is quietly gathering pace. The July flash surveys show the upturn led, unusually, by manufacturing rather than services (chart 3), and the hard data are beginning to agree, with manufacturing orders across many major economies turning firmly higher (chart 4). Equity markets, for their part, have taken elevated real rates in their stride, the bond–equity relationships that fractured in 2022 having since been restored (chart 5) — the signature of a market that believes it has entered a higher-return, investment-led regime. The optimism is not unqualified. A fresh round of US tariffs and a sharp sell-off in chip stocks, led by South Korea, are reminders that the payoff from all this spending is far from assured. And the boom is colliding with a physical constraint: since the breakdown of the US–Iran understanding, Baltic tanker and gas freight rates have surged even as dry-bulk rates have stayed calm (chart 6), a pointed warning about the security of the world’s energy arteries.

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Charts of the Week: The Price of an Investment Boom

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The U.S. ISM Services PMI inched up to a lower-than-expected 54.1 in July following a 0.5-point decline to 54.0 in June, according to data from the Institute for Supply Management, showing expansion in the services sector for the 25th straight month. The July index was above 50.5 in July 2025 and a low of 49.4 in June 2024, while remaining below its recent high of 56.1 in February and a record-high 67.5 in November 2021. The 12-month average was 53.4, pointing to continued growth in the U.S. services sector. The Action Economics Forecast Survey had expected 54.4 for July.

Haver Analytics constructs a composite index combining the services index and the manufacturing reading. This index rebounded to 54.3 in July after a 0.5-point decrease to 53.9 in June, signaling expansion for the 14th successive month. The latest reading was above 50.3 in July 2025 and a low of 49.3 in June 2024, albeit remaining below a high of 55.7 in February and a record-high 66.7 in November 2021. These series date back to July 1997.

In the latest services survey, the business activity index rose to 59.1 in July following a 2.3-point drop to 55.4 in June, indicating continued expansion in business activity for 25 months in a row and at the fastest pace since February. The index was above a low of 50.0 in June 2024 but below a peak of 70.9 in November 2021. In July, an increased 31.4% of respondents (NSA) reported higher activity while 10.1% reported an activity decline. The new orders index increased to 57.2 in July after a 2.2-point drop to 55.1 in June, reflecting expansion in new orders for the 14th consecutive month. The index was above a low of 47.2 in May 2025 but below a high of 61.0 in February 2023 and a record-high 69.2 in October 2021. In July, an increased 27.3% of respondents (NSA) reported higher new orders while 13.9% reported declines. Meanwhile, the supplier deliveries index (NSA) fell to 52.8 in July from 54.4 in June, indicating continued slowing in supplier deliveries for the 20th straight month, albeit at a less pronounced rate than in June, following one month in faster territory in November 2024.

On the labor front, the employment index dropped to 47.4 in July following a 3.3-point gain to 51.2 in June, showing employment activity in the services sector contracted for the fourth time in five months and at the fastest contraction rate since March. The latest reading was above a low of 43.5 in December 2023 but below a high of 54.1 in June 2023 and a peak of 58.9 in April 2021. In July, 14.3% of respondents (NSA) indicated higher employment while an increased 19.0% reported declines.

On the inflation front, the prices index, above 70 for the fourth time in five months, advanced to an elevated 70.3 in July from 67.7 in June, indicating prices paid by services organizations for materials and services had risen (i.e., above 50) since June 2017. The index was above a low of 53.9 in March 2024 but far below a peak of 83.7 in March 2022. In July, an increased 44.7% of respondents (NSA) reported higher prices while only 3.2% reported price declines.

Additionally, the new export orders index rose to 52.0 in July from 50.4 in June, showing new export orders expanded for the fifth time in six months and at the fastest rate since April. The imports index rebounded to 51.8 in July from 49.4 in June, marking the fifth expansion in six months. The inventories index edged up to 51.4 in July from 51.2 in June, indicating inventories expanded for the sixth successive month, while the inventory sentiment index dipped to 52.5 from 52.6, showing continued expansion since May 2023. The backlog of orders index slid to 50.9 in July from 54.9 in June, marking the slowest pace of expansion in six consecutive months following 11 straight months of contraction. These series are not seasonally adjusted and not included in the ISM Services PMI total.

The ISM Services PMI is a composite index consisting of four equally weighted diffusion indexes: Business Activity, New Orders, Employment, and Supplier Deliveries. A reading above 50 indicates expansion in the services sector; below 50 suggests contraction. Supplier Deliveries is the only ISM index that is inversed; a reading above 50 indicates slower deliveries. The ISM figures are available in Haver's **USECON** database, with additional detail in the **SURVEYS** database. The expectations figure from Action Economics is in the **AS1REPNA** database.

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- ISM Services PMI slightly up to 54.1 in July, remaining above the 12-month avg. of 53.4.
- Business Activity (59.1) expands for the 25th consecutive mth.; New Orders (57.2) for the 14th straight mth.; Employment (47.4), at a four-month low, contracts in four of five mths.; Supplier Deliveries (52.8 vs. 54.4).
- Prices Index (70.3) elevated and above 70 for the fourth time in five mths., indicating prices rising since June ’17.

U.S. ISM Services PMI Edges Up in July, Indicating Expansion for the 25th Straight Month

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