US consumer credit rose by $8.05B in January, compared with expectations of $12B. The increase was $3.95B lower than forecast.
The data points to slower growth in total borrowing by households during the month. This release focuses on consumer credit, which typically includes revolving credit such as credit cards and non-revolving loans such as auto and student borrowing.
Consumer Pullback Signals
The January consumer credit miss is a clear warning sign that the consumer is finally pulling back after a strong 2025. We saw this confirmed in the most recent February jobs report, which showed the unemployment rate ticking up to 4.1% and weaker wage growth. This data directly challenges the soft-landing narrative that has propped up markets.
This cooling trend puts the Federal Reserve in a difficult position, increasing the odds of a rate cut sooner than anticipated. The market is now pricing in a greater than 50% chance of a rate cut by the June meeting, a sharp increase from just 20% a month ago. We should position for increasing dovishness from the central bank.
With uncertainty growing, we should anticipate higher market volatility. The VIX has already climbed from the low teens to over 18 in the past few weeks, and buying VIX call options with May expirations is a direct way to hedge against or profit from a coming spike in fear. This is a cost-effective strategy to protect against sudden market drops.
Given the pressure on the consumer, we should look to express a bearish view on consumer-focused equities. Buying put options on the consumer discretionary ETF (XLY) offers direct exposure to this weakness. Looking back at similar slowdowns in 2023, this sector consistently underperformed the broader market when credit conditions tightened.
Rates And Bond Opportunities
In contrast, as the likelihood of rate cuts increases, government bonds become more attractive. The U.S. 10-year Treasury yield has already dipped below 3.8% in response to this recent string of weak data. We should consider buying call options on long-duration Treasury bond ETFs, such as TLT, to profit from a further decline in yields.
