Recent US Nonfarm Payrolls data, including revisions, prompted discussion regarding interest rates at the Federal Reserve. There is ongoing concern about inflation, especially with recent tariff increases.
The labour market appears to be slowing from previously strong levels, raising questions about future hiring trends. Despite this, one rate cut is still anticipated by the year’s end.
risks and uncertainties
Current risks related to inflation and employment seem to be reaching equilibrium. However, uncertainties remain, posing challenges for Federal Reserve policy discussions.
Tariffs are complex and may affect pricing significantly, with the potential to complicate Federal Reserve responses. The environment is challenging, with risks tied to both employment and inflation mandates.
An active debate continues on the current restrictiveness of Fed policy. Future policies may change based on evolving data over the coming months.
market volatility and strategy
With the latest July 2025 Nonfarm Payrolls report showing a gain of only 160,000 jobs, below expectations, the slowing labor market is becoming more apparent. We see this putting the Federal Reserve in a difficult position as it weighs this weakness against persistent inflation. This suggests we should prepare for heightened market volatility in the coming weeks.
Inflation concerns are being amplified by the tariffs introduced last quarter, which are keeping core CPI stubbornly high at around 3.1% year-over-year. This is well above the Fed’s target and complicates any decision to lower interest rates. The conflicting signals from a weakening job market and sticky prices create a tense equilibrium.
Given this standoff, we believe traders should consider strategies that benefit from price swings rather than a specific direction. The VIX, a measure of expected volatility, has already crept up from its lows in early 2025 to around 18, indicating rising uncertainty. Buying options on major indices could prove to be a prudent approach to navigate the next few months.
Futures markets are currently pricing in about a 65% chance of one rate cut by the December 2025 meeting, but the timing remains a key variable. This uncertainty over whether a cut comes in September, November, or December presents an opportunity in itself. We should be looking at options on interest rate futures to trade the shifting expectations around the Fed’s next meeting.
Looking back to the period of 2018-2019, we saw the Fed pivot from hiking to cutting rates as economic data softened, showing how quickly policy can shift. That historical precedent suggests that holding firm directional convictions right now is risky. Nimbleness is more valuable than being heavily committed to one outcome.
Therefore, we are also watching options on long-duration bond ETFs. If the employment data weakens further and forces the Fed’s hand sooner than anticipated, call options on these instruments would likely perform well. This provides a way to position for a surprise dovish shift from the central bank.
