The United States Chicago PMI was 57.7 in February. This was above the forecast of 52.8.
The strong Chicago PMI number is a clear sign that the manufacturing economy is running hotter than we anticipated. This positive economic surprise immediately challenges the market’s narrative that the Federal Reserve would be cutting interest rates by mid-year. We must now prepare for the possibility that rates will remain higher for a longer period.
Higher For Longer Rates
This outlook puts direct pressure on government bonds, likely causing their prices to fall and yields to rise. We saw the 10-year Treasury yield react similarly to strong data throughout 2025, often testing higher resistance levels. Derivative traders should consider positions that benefit from rising yields, such as shorting Treasury note futures or buying puts on bond ETFs like TLT.
For the S&P 500, this creates uncertainty and could increase market volatility. January’s core inflation reading was still a firm 3.1%, and this new data will only strengthen the Fed’s resolve to keep policy tight. This suggests traders could buy protection or speculate on bigger price swings by purchasing call options on the VIX index, which has been hovering near multi-month lows.
On a sector level, the report is very bullish for industrial and raw material companies. The increased manufacturing activity points to higher demand for commodities like copper, which just recently saw its inventories hit a 6-month low. We could use call options on industrial ETFs or go long on copper futures to trade this specific strength.
The U.S. dollar should also benefit as higher interest rate expectations make it more attractive than other currencies. We can expect the dollar to gain against the euro and yen, whose central banks remain comparatively dovish. This makes buying call options on dollar index funds a viable strategy in the coming weeks.
