National Bank of Canada said US growth expectations remain robust, with GDP forecast to expand above 2% in 2026, but the inflation backdrop is viewed as less benign. Headline inflation is expected to move towards 2% by mid-2027, while core inflation is seen as more persistent. <\/p>\n\n
The Federal Reserve is framed as prioritising price stability, and policy-makers are described as split, with about half favouring tighter settings. Even so, market sentiment among economists remains sceptical about additional tightening: only 10% of forecasters anticipate a Fed rate rise in 2026, and that group remains smaller than those looking for cuts.<\/p>\n\n
We are looking at a market where the economy is performing well, but inflation isn’t cooperating. The final revision for Q1 2026 GDP was just bumped up to 2.4%, confirming underlying economic momentum that supports corporate earnings. This strength, however, is what is likely keeping core inflation sticky and the Federal Reserve on high alert.<\/p>\n\n
The latest Core PCE reading for May 2026 came in at 2.9%, stubbornly above the Fed’s target and dashing hopes for a near-term rate cut. This creates a significant disconnect between a market still pricing in at least one rate cut by year-end and a data-dependent Fed that may be forced to hold steady. This uncertainty suggests we should consider buying volatility through options on major indices.<\/p>\n\n
Given the Fed’s focus on price stability, we see value in derivatives that bet on interest rates staying higher for longer. Options on Secured Overnight Financing Rate (SOFR) futures could be used to position for a Fed that doesn’t cut rates as expected in the second half of 2026. This situation feels similar to the 2023-2024 period, where markets consistently priced in rate cuts that the Fed was hesitant to deliver.<\/p>\n\n
This environment also points toward potential U.S. dollar strength, as a hawkish Fed stands out against other central banks. Just last week, Fed Governor Waller reiterated the need to see “several consecutive months” of inflation data moving sustainably to 2% before considering any policy easing. We can express this view by buying call options on the U.S. Dollar Index (DXY), anticipating the dollar will appreciate if the Fed holds firm.<\/p>\n\n\n\n