Markets are braced for a 25 bps move from the FOMC next week, which would take the federal funds rate target range to 3.75%–4.00%. US demand data are expected to stay firm, as consumer spending is seen holding up and retail sales are projected to rebound by 0.7% in August. Housing indicators look weaker, with elevated mortgage rates and affordability constraints expected to keep August housing starts under pressure.
Overseas, attention remains on central bank decisions. The Bank of Japan is expected to raise rates by 25 bps, while the Bank of England is forecast to leave policy unchanged even as it retains a hawkish tone. In emerging markets, India’s CPI is projected to rise to 4.75% year-over-year, and in Brazil cooler inflation is expected to underpin another 25 bps rate cut to 13.75%.
Derivatives Positioning and Equity Market Strategies
We recommend that derivative traders position for the upcoming 25 basis point Fed hike by shorting front-end SOFR futures to capture the target range increase to 3.75%–4.00%. To capitalize on the resilient 0.7% rebound in retail sales, traders should consider buying near-term call options on consumer discretionary ETFs. Conversely, we suggest buying put options on homebuilder ETFs like ITB, as historical data shows elevated mortgage rates continue to heavily depress housing starts.
Currency and International Market Opportunities
In currency markets, we advise buying yen call options ahead of the Bank of Japan’s expected 25 basis point rate hike. This policy tightening could trigger another unwinding of the yen carry trade, similar to the global market shakeup in August 2024 when a small BoJ rate hike sent the Nikkei index into a sudden 12% single-day drop. Going long on JPY volatility through USD/JPY straddles is an excellent way to protect portfolios against sudden currency swings in the coming weeks.
For European exposures, we suggest purchasing GBP/USD call options to benefit from the Bank of England’s expected hawkish pause. In emerging markets, traders should consider call options on the iShares MSCI Brazil ETF (EWZ) ahead of an anticipated 25 basis point rate cut to 13.75%. Meanwhile, with India’s CPI expected to ease to a softer-than-expected 4.75%, going long on Nifty 50 index futures can help capture a likely relief rally in Indian equities.
