The US Chicago PMI registered 56.7 in June, falling short of the 58.1 market forecast. The reading nevertheless remained in expansionary territory, pointing to continued growth in business conditions across the Chicago region.<\/p>\n
The lower-than-expected outcome indicates a softer pace of activity than anticipated at the end of the second quarter. Markets will weigh whether the June miss reflects temporary volatility in regional data or a broader cooling in US manufacturing and related sectors.<\/p>\n
With the Chicago PMI data for June coming in weaker than expected, we see this as a clear signal that economic momentum is slowing. While the 56.7 reading still indicates expansion, the miss points to a cooling in manufacturing activity. This suggests potential headwinds for corporate earnings in the third quarter.<\/p>\n
Given this, we are looking to add downside protection to our equity portfolios over the coming weeks. Buying put options on the S&P 500 or specific industrial sector ETFs offers a direct hedge against a potential market dip. This view is reinforced by the latest national ISM Manufacturing report, which showed the new orders component falling to its lowest level in six months.<\/p>\n
The uncertainty created by this slowing growth narrative will likely lead to higher market volatility. We anticipate the VIX, which has been hovering near 14, could climb back towards the 18-20 range. We are considering buying VIX call options as a cost-effective way to profit from an expected rise in market choppiness.<\/p>\n
This economic softness makes it highly unlikely the Federal Reserve will consider further rate hikes. In fact, we see the market beginning to price in a more dovish stance from the central bank, especially with recent Core PCE inflation moderating to 2.5%. We are therefore positioning for lower rates by buying December SOFR futures, which will gain in value if the Fed signals a pause or pivot.<\/p>\n
Historically, periods of weakening manufacturing data have often preceded a policy shift from the Fed, similar to what we observed in 2019. Back then, a slowdown in PMI figures led the Fed to cut interest rates three times, which ultimately supported risk assets. We are watching for similar forward guidance from Fed officials in their upcoming speeches.<\/p>\n
Finally, a more dovish Fed typically translates to a weaker U.S. dollar. We will be looking for opportunities to sell the dollar against other major currencies, potentially through futures or options on the Euro. This economic slowdown also implies softer demand for industrial commodities, leading us to reduce our long exposure to copper.<\/p>\n\n\n\n