US private sector business activity in February grew at a slightly slower pace than in January, based on S&P Global’s preliminary Composite PMI. The index eased to 52.3 from 53.
The Manufacturing PMI fell to 51.2 from 52.4, while the Services PMI slipped to 52.3 from 52.7. Both readings were slightly below analysts’ estimates.
Drivers Of The February Slowdown
S&P Global reported weaker demand, high prices, and adverse weather as factors weighing on activity in February. Output growth was the slowest in 10 months, and factory orders fell, with job growth slowing across manufacturing and services.
The US Dollar Index showed no immediate response to the data. It was last up 0.12% on the day at 97.95.
With business activity slowing more than expected, we need to adjust our view on economic strength. The dip in both manufacturing and services suggests the robust growth we saw in late 2025 is starting to fade. This softness, especially the drop in new factory orders, points toward a potential cooling in corporate earnings ahead.
This data directly impacts our view on Federal Reserve policy. After the last FOMC meeting kept rates steady, this report makes a future interest rate hike much less likely and brings the possibility of a rate cut into play later this year. We can see this shift in the Fed Funds futures market, where the odds of a fourth-quarter rate cut have now ticked up to over 50%.
Positioning Implications For Markets
For the coming weeks, we should consider buying volatility, as this report introduces significant uncertainty. The VIX has been hovering near a low of 14, and this combination of slowing growth alongside the still-elevated January CPI reading of 3.1% creates a conflict for the market. This is a classic setup for a spike in volatility, making call options on the VIX or other volatility indexes look attractive.
In equity markets, this suggests a more defensive posture is warranted, particularly in cyclical sectors. We should look at buying put options on industrial and materials ETFs as a hedge against the reported decline in factory demand. The service sector is holding up better, but the slowdown in job creation across the board is a warning sign for consumer spending.
While the US Dollar Index was flat today, the underlying tone is negative for the currency. A slowing economy and the prospect of earlier Fed rate cuts weaken the dollar’s appeal. We see an opportunity in positioning for a lower dollar against currencies where the central bank may remain more hawkish, such as by purchasing call options on the euro.
Looking back, the strong economic rebound that characterized most of 2025 appears to be losing momentum as we move through the first quarter of 2026. The slowdown is reminiscent of previous mid-cycle adjustments, where Treasury yields tend to fall. We should anticipate the 10-year Treasury yield, currently at 4.15%, to test the 4.0% level again, presenting opportunities in bond futures.
