Insights 
VT 
The US economy is facing another series of disappointing data releases. The recent US ISM services PMI showed weaker-than-expected figures, raising concerns of further poor data, following a disappointing labour market report.
This is affecting US market sentiment and the dollar negatively, as expectations were for the dollar stabilisation and a pause in changes from the Federal Reserve. Current market pricing now anticipates a rate cut in September. The US economy could be returning to the sluggish conditions witnessed earlier this year, suggesting more negative surprises are ahead.
The ISM Report Details
The ISM report highlighted a decline in the employment index from 47.2 in June to 46.4 in July, adding to concerns after last week’s poor jobs report. The manufacturing sector also showed a decline to 43.4, marking its weakest level since June 2020. Despite weaker correlations with non-farm payrolls post-pandemic, the trend indicates continued labour market softness into late 2025.
Additionally, the report noted an increase in the prices paid component from 67.5 in June to 69.9 in July, the highest since October 2022. Tariffs are largely to blame for rising inflation concerns, which may challenge the Federal Reserve’s decision-making on rate cuts, though these tariff-induced effects are seen as temporary.
Recent US data is starting to show serious cracks, shifting our entire outlook. The weak ISM services report, combined with the disappointing jobs number from last Friday, suggests a trend of economic downside. That jobs report showed a gain of only 95,000, well below expectations and pushing the unemployment rate up to 4.0%.
This turn in the data comes at a critical time, shaking the recent stability in the US dollar. We are now seeing markets aggressively price in a Federal Reserve rate cut for the September meeting. Fed Funds futures currently imply a greater than 70% probability of a 25 basis point cut, a stark reversal from just a month ago.
The underlying details on employment are particularly concerning for the months ahead. The ISM employment index fell to 46.4, a level that historically points to further weakness in the labor market. We should prepare for non-farm payrolls to remain soft through the second half of 2025.
Trading Strategies and Economic Implications
For traders, this points towards positioning for lower interest rates. We believe buying call options on Treasury bond ETFs, such as TLT, could be a valuable strategy to capture the potential fall in yields. The expectation of a dovish Fed is the primary driver for this view.
A softer Fed policy will almost certainly translate to a weaker US dollar. We are watching the Dollar Index (DXY) closely as it tests key support levels. Buying puts on dollar-tracking ETFs or calls on major currency pairs like EUR/USD offers a direct way to trade this theme.
However, there is a complication from the rising prices paid component in the ISM report, which hit its highest level since late 2022. The most recent CPI data for July showed inflation re-accelerating slightly to 3.3%, largely due to tariffs on imported goods. This puts the Fed in a difficult position, having to weigh slowing growth against this sticky inflation.
This conflict between a weakening economy and stubborn price pressures is a classic recipe for higher market volatility. The VIX index is still relatively low, making call options on it an inexpensive way to hedge portfolios or speculate on a surge in market anxiety. We anticipate more choppy conditions as the Fed navigates these opposing forces.
We have seen this playbook before, when markets began to price in the Fed’s policy pivot during late 2023. Back then, anticipating the shift from hikes to cuts was the most profitable macro trade. The current environment feels very similar, rewarding those who position for a more aggressive central bank response to a slowing economy.
