US factory orders fell 1.3% month on month in May. The result was better than the market forecast for a 1.8% decline, pointing to a smaller contraction in order volumes than anticipated.
On a relative basis, the data indicate demand for manufactured goods softened but did not drop as sharply as expected. The 0.5 percentage-point gap between the actual reading and the consensus estimate may affect near-term assessments of industrial momentum.
Factory Orders Signal Cooling, Not Collapsing, Economy
We see the May factory orders decline of 1.3% as a sign of a cooling, but not collapsing, economy. Because the number was better than the -1.8% feared, it tempers immediate recession concerns. This less-bad-than-expected news supports a market that is looking for reasons to remain steady.
Our attention now shifts completely to the June Non-Farm Payrolls report, which is the next major catalyst. Current online consensus estimates point to a gain of around 180,000 jobs, which would signal a continued, gradual slowdown in the labor market. A number significantly above 225,000 or below 150,000 would likely force a major market repricing.
This places the Federal Reserve in a holding pattern ahead of its late July meeting. Fed funds futures are currently pricing in a 55% probability that the Fed will hold rates steady, reflecting the market’s uncertainty. We are positioning using options on SOFR futures to prepare for a shift in these odds following the jobs report.
Market Volatility Plays and Tactical Strategies Ahead
Implied volatility in the equity markets is likely to rise in the coming days. The VIX index has been trading in a tight range around 14, but we anticipate it will climb towards 16 as traders buy protection ahead of the employment data. We are considering strategies like purchasing short-dated straddles on the S&P 500 to trade this expected increase in volatility.
This situation is reminiscent of the choppy markets in early 2024, where mixed data led to range-bound trading rather than a clear trend. Given that historical parallel, we are favoring tactical trades that benefit from either a sharp move or continued consolidation. Selling out-of-the-money puts on strong sectors could be a viable strategy if the jobs data comes in as expected, causing volatility to decline.
