The Atlanta Fed has adjusted its GDPNow Q3 tracker from 3.5% to 3.0%. This revision comes after new data from the US Census Bureau and the Institute for Supply Management.
These updates altered the predictions for third-quarter real personal consumption expenditures growth and real gross private domestic investment growth.
Rising Impact of Inventory Investment
However, there was a rise in the nowcast of inventory investment’s impact on third-quarter real GDP growth, increasing from 0.59 percentage points to 0.69 percentage points.
This revision suggests the economy is cooling faster than anticipated, which changes our view on Federal Reserve policy for the rest of the year. We are now seeing a higher probability that the Fed will pause its rate-hiking cycle. The market’s expectation for a November rate hike has already dropped from 55% to 35% in overnight swaps following this news.
Given this, we should look at interest rate derivatives that would profit from a more dovish Fed. This includes buying December 2025 SOFR futures, as their value will rise if the market prices out future hikes. The latest CPI data from August 15th showed core inflation dipping to 2.9%, giving the central bank cover to pause.
Potential Pressure on Corporate Earnings
For equity indices, the lower growth forecast implies pressure on corporate earnings. We should consider buying protective puts on the S&P 500 with October expirations to guard against a potential downturn. The most recent non-farm payroll report showed job growth slowing to 155,000, supporting the idea that economic momentum is waning.
This shift in economic data increases uncertainty, especially ahead of the September 20th FOMC meeting. We should anticipate a rise in market volatility. Buying VIX call options is a direct way to position for this expected increase in choppiness.
The data also points to weakness in consumer spending and business investment, making specific sectors vulnerable. It would be prudent to use options to express a bearish view on consumer discretionary ETFs. At the same time, we saw defensive sectors like utilities outperform during similar slowdowns back in 2023 and 2024.
We have seen this pattern before, where weakening growth forecasts forced the Fed to pivot away from a hawkish stance. Looking back at the market reaction in late 2018, the Fed’s pause led to a significant rally in fixed income and a volatile but eventually positive reaction in equities. This historical context suggests being prepared for sharp, fast-moving markets in the coming weeks.
