Insights 
VT 
The Philadelphia Fed Business Index for July showed an increase to 15.9, compared to the previous month’s -4.0 and an expected -1.0. New Orders surged to 18.4 from last month’s 2.3, while Shipments rose to 23.7 from 8.3 last month.
Unfilled Orders declined to 5.7 from 9.3, and Delivery Time fell to -4.7 from the previous 13.6. Inventories decreased to -1.3 compared to last month’s 3.6. Prices paid climbed to 58.8 from 41.4, and Prices received increased to 34.8 from 29.5.
Employment And Workweek Indexes
The Number of Employees index turned positive, moving to 10.3 from last month’s -9.8. The Average Workweek improved slightly, changing to 0.4 from -1.6 last month. All three indexes reached their highest readings since February.
The employment index indicates increases in employment levels, while rising price indexes suggest ongoing overall price increases. Future activity indicators show expectations of continued growth over the next six months. Despite being volatile and rarely impacting the market, the index provides insights into business expectations.
We see this unexpectedly strong report as challenging the consensus view of a rapidly weakening economy. The significant jump in new orders and shipments suggests underlying demand remains robust. This resilience could allow the Federal Reserve to maintain its hawkish stance for longer than the market anticipates.
The jump in the prices paid index is a notable point of concern for us, even as delivery times improve. This regional inflation spike contrasts with the latest national Consumer Price Index report, which showed headline inflation cooling to 3.0% in June. This discrepancy creates uncertainty and suggests the path of inflation will not be a straight line down.
Monetary Policy And Market Strategies
This data reinforces the case for at least one more interest rate hike from the central bank. The CME FedWatch tool shows markets are already pricing in over a 90% probability of a rate hike in late July, and this report does nothing to discourage that view. We believe derivative traders should adjust positions that are heavily reliant on rate cuts happening in 2023.
It is important to remember this is a regional survey, and it stands in contrast to broader national trends. For instance, the national ISM Manufacturing PMI has been in contraction territory below 50 for eight consecutive months. The strength here could signal a turning point for the sector, or it could simply be a positive outlier.
The scale of this report’s beat against expectations introduces uncertainty, which is fuel for market volatility. Historically, large deviations in economic data can cause short-term spikes in the CBOE Volatility Index (VIX), which recently has been trading near multi-year lows around the 14 level. We think option premiums are relatively cheap, making it an opportune time to consider strategies that profit from an increase in volatility.
Given these cross-currents, we would favor options strategies over simple directional bets in the coming weeks. Traders could look at buying call options on industrial or material sector ETFs to play the strong activity data. Hedging these bets with puts on the broader S&P 500 or rate-sensitive tech stocks seems like a prudent response to the persistent inflation signal.
