Insights 
VT 
The US Philadelphia Federal Reserve’s non-manufacturing index showed an improvement from the previous figure. The index moved to -25.0 from the prior -41.9.
While a lower-tier indicator, this index has displayed volatility. The recent change suggests some positive movement in the sector.
Marked Shift In Non-Manufacturing Index
The latest reading from the Philadelphia Fed’s non-manufacturing index, although still in contractionary territory at -25.0, shows a marked shift from the previous -41.9. Though not a headline economic release, this data can at times produce sharp reactions, especially in quieter trading sessions. The narrower contraction shouldn’t be overlooked, particularly given how sensitive services can be to broader fluctuations in demand.
Earlier, markets had grown accustomed to pronounced weakness in regional activity surveys. However, what we’re seeing here is a slowing of that deterioration rather than a full reversal. It’s a subtle but measurable improvement. From our point of view, that’s enough to adjust for near-term volatility, especially in instruments that are sensitive to US economic sentiment.
Powell’s recent comments still hold sway. On Wednesday, he avoided giving any hints about a timetable for rate reductions, keeping the Fed’s direction purposefully tied to upcoming data. What’s clear from his rhetoric is an emphasis on being guided by actual progress, not simply forecasts, even when they are broadly agreed upon.
Market Reactions And Volatility
Markets, however, aren’t hesitating. Fed Funds futures are still leaning toward two cuts before the year is out. The implied pricing hasn’t shifted much this week, which suggests that the recent soft indicators haven’t shaken that conviction. The reaction in bond yields, however, shows that the broader mood remains cautious.
In our trading, that means we should prepare for two seemingly opposite possibilities: a data-reliant central bank that sees rate changes as optional rather than necessary, versus a market that’s fairly locked-in to expecting them. That disconnect opens opportunities in rates volatility. Options pricing may offer asymmetric payoffs if we remain nimble.
We should also keep an eye on how the stronger elements in the services sector feed into inflation readings. A slowdown in deterioration might imply pressure is building again — not enough to cause alarm, but enough to nudge expectations. That could dampen the current dovish lean.
Moreover, responses to intermediate data like this can be revealing. If weaker numbers are still ignored by rates traders, there’s a limit to how dovish positioning can run. But if stronger data continues to arrive with diminishing market response, complacency is likely setting in — and that can be exploited.
At this stage, premium on short-dated options remains subdued. That could shift quickly if data ahead surprises in either direction. It’s worthwhile to be positioned for that — not heavily, but flexibly.
Yellen’s separate remarks this week hinted that resilience remains the working assumption. Fiscal support isn’t being scaled unnecessarily, which aligns with expectations that the economy doesn’t need fresh prodding. That view reinforces the delay in rate cuts.
We’ve also noticed dealers adjusting hedges slower than before. Strike skews are flatter — a subtle sign that fewer are willing to chase directional conviction. That suits spreads that anticipate volatility rather than direction.
For now, the key is coordination between incoming data and market response. Only when both move in tandem does it become possible to trust the pricing curve. Until then, stay positioned for misalignment. That’s where the value lies.
