The US ISM Manufacturing PMI registered 53.3 in June, coming in below the market forecast of 54. The reading still indicates expansion in factory activity, but the miss suggests momentum was softer than expected.
Outlook For US Growth, The Fed, And Volatility
The June manufacturing data came in below what we expected, showing a reading of 53.3. While this number still indicates the sector is growing, it suggests the pace of economic expansion is losing momentum. We are adjusting our strategy to account for this potential slowdown in the coming weeks.
We believe this weaker data makes the Federal Reserve less likely to pursue an aggressive interest rate policy. The CME FedWatch Tool now shows the probability of a rate hike at the next meeting has dropped from 45% to just below 30% since the number was released. Therefore, we are looking to add to positions in short-term interest rate futures, which benefit from a more dovish central bank.
This kind of economic surprise often brings uncertainty, which can lead to higher market volatility. Historically, we have seen periods where a string of weaker-than-expected data points, like in late 2024, caused the VIX index to climb by over 30% in a month. We are buying VIX call options with an August expiration to protect against, and potentially profit from, a similar rise in choppiness.
Implications For Sectors And Currencies
The slowdown in manufacturing has a direct impact on industrial companies, whose earnings are closely tied to economic growth. With the new orders component of the ISM report also declining for the second straight month, we see headwinds for this sector. We are considering put spreads on industrial sector ETFs to position for this group to underperform the broader market.
A cooling US economy also tends to weaken the US dollar, especially as other central banks remain more hawkish. For instance, the European Central Bank has seen recent inflation data come in hotter than expected, suggesting they have less room to ease policy. This divergence leads us to favor long positions in EUR/USD futures, anticipating a shift in currency strength away from the dollar.
