The ISM manufacturing prices paid index in the United States registered 73 in June, missing market expectations of 79. The reading points to continued input cost pressures in the factory sector, though at a lower level than forecasters had projected.<\/p>\n
At 73, the gauge remains elevated on an absolute basis even as it undershot consensus. The June outcome implies pricing conditions for manufacturers were less intense than anticipated, based on the gap versus the 79 estimate.<\/p>\n
We see the recent ISM prices paid data as a significant sign that inflationary pressures are cooling faster than anticipated. This lower-than-expected reading at 73 suggests the cost of raw materials for manufacturers isn’t rising as quickly. This directly lessens the pressure on the Federal Reserve to continue with an aggressive rate-hiking policy.<\/p>\n
Given this, we are adjusting our view on the path of short-term interest rates. We anticipate the market will begin pricing out the probability of a September rate hike, which recent CME FedWatch data had pegged at over 60%. Consequently, we are looking to take long positions in December SOFR futures, betting that the forward curve is currently too steep.<\/p>\n
This potential for a less hawkish Fed is a tailwind for equities, particularly for interest-rate-sensitive growth stocks. We observed Nasdaq 100 futures immediately rally 0.8% in the minutes following the ISM release. We believe buying out-of-the-money call options on the QQQ ETF for August expiration offers an attractive risk\/reward profile.<\/p>\n
A clearer path for monetary policy should dampen market uncertainty, leading to lower implied volatility. The VIX index has been stubbornly holding near 19, and we see this data as a catalyst for it to break lower. We are considering selling VIX futures or initiating put spreads on the VIX for the coming weeks.<\/p>\n
Lower interest rate expectations typically weaken a currency, and we expect the US Dollar to face headwinds. The Dollar Index (DXY) is likely to test its recent lows around the 103.50 level. This situation is reminiscent of late 2022, when similar disinflationary signals preceded a multi-month dollar decline, making long positions in EUR\/USD futures an appealing trade.<\/p>\n\n\n\n