The Atlanta Fed GDPNow model has revised its third-quarter growth estimate, lowering it from 2.3% to 2.1%. This adjustment follows the release of recent economic data, which caused a reduction in growth forecasts for personal consumption expenditures and private fixed investment.
Personal consumption expenditure growth projections fell from 1.9% to 1.6%, while private fixed investment growth forecasts decreased from 2.5% to 2.0%. However, there was an increase in the expected contribution of inventory investment to GDP growth, rising from 0.63 percentage points to 0.74 percentage points.
Real Time Estimate Of GDP Growth
The GDPNow model provides a real-time estimate of GDP growth and is updated frequently. The next update by the model is scheduled for Tuesday, August 5. This updated estimate reflects adjustments based on data from several sources, including the US Bureau of Labor Statistics and the US Census Bureau.
Based on this morning’s data, we see the forecast for Q3 growth has been trimmed to 2.1%. This slowdown is tied directly to weaker numbers for consumer spending and business investment. We are now factoring in this cooling trend for the coming weeks.
This revision follows a string of disappointing reports that give it weight. The July jobs report, released today, showed the economy added only 155,000 jobs, well below the 190,000 expected, while the ISM Manufacturing index fell to 50.2, barely in expansion territory. July’s retail sales also came in flat, confirming a cautious consumer.
Market Volatility And Investment Strategies
With this backdrop of uncertainty, we expect market volatility to rise from its current lows. The VIX, a key measure of fear, has already ticked up towards 18, and option premiums are likely to get more expensive. This suggests that now is the time to consider buying protection or establishing positions that benefit from bigger price swings.
We are looking at defensive positions in the equity markets. Buying put options on the S&P 500 or the Nasdaq 100 provides a direct hedge against a potential market dip. This strategy is reminiscent of the slowdowns we navigated in 2019 and 2022, where early defensive posturing proved beneficial.
The prospect of slower growth reduces the likelihood of any near-term interest rate hikes from the Federal Reserve. Consequently, we see an opportunity in interest rate derivatives, specifically through call options on long-term bond ETFs like TLT. This position would profit if bond prices rise as yields fall on the weaker economic outlook.
On a sector-specific level, this environment favors defensive industries over cyclical ones. We are considering buying puts on consumer discretionary ETFs while simultaneously looking at calls on consumer staples and utilities. This creates a relative value position that could perform well even if the broader market moves sideways.
