The latest ISM Manufacturing survey points to continued US economic resilience even as uncertainty in the Middle East persists. The headline index rose to 54.0 in May, a four-year high, and breadth improved as four of the five sub-indices that feed into the overall measure increased. New orders also strengthened, indicating momentum in factory activity despite the geopolitical backdrop.<\/p>\n
In MUFG\u2019s US inflation composite framework, the ISM manufacturing prices index remains a central input, and the latest reading equates to a +2 standard deviation shock on a rolling two-year basis, pushing the composite higher. Energy and manufacturing inputs continue to be the main sources of price pressure, with elevated oil and commodity prices reinforcing upstream inflation, while domestic wage dynamics are described as contained. This mix adds complexity to the Federal Reserve\u2019s policy setting.<\/p>\n
Given the surprising strength in the US manufacturing sector, we believe the market is underpricing the risk of the Federal Reserve holding interest rates steady for longer than anticipated. The May ISM index hit 54.0, a four-year high, indicating an economy that can withstand restrictive policy. We are therefore adjusting our positions in interest rate swaps to reflect fewer rate cuts priced in for the second half of the year.<\/p>\n
This divergence between a resilient economy and stubborn inflation is likely to increase market choppiness. The VIX, which has been hovering near a low of 14, appears too complacent given the Fed’s potential policy shift. We see an opportunity in buying short-dated call options on the VIX to hedge against or profit from a sudden spike in volatility.<\/p>\n
Upstream price pressures from energy and raw materials continue to be a primary concern, directly fueling inflation. With WTI crude oil holding firmly above $85 per barrel, a level not seen since late last year, we expect companies’ input costs to remain elevated. Consequently, we are favoring bull call spreads on energy sector ETFs to capitalize on this persistent strength.<\/p>\n
A more hawkish Federal Reserve outlook is fundamentally bullish for the US dollar. As other central banks like the ECB begin their easing cycles, the widening interest rate differential should drive capital towards the dollar. We see value in taking long positions on the dollar against the Euro, anticipating the DXY index will test its year-to-date highs.<\/p>\n
The latest CPI data supports this view, with core inflation coming in at a sticky 3.8%, reversing the cooling trend we saw in April. This mirrors past cycles where the central bank had to delay planned rate cuts due to surprisingly robust economic activity. Traders should be wary of any strategies that are heavily dependent on imminent Fed easing.<\/p>\n","protected":false},"excerpt":{"rendered":"
May ISM hits four-year high, lifting inflation pressures; markets underprice higher-for-longer Fed and volatility hedges.<\/p>\n","protected":false},"author":25,"featured_media":47964,"comment_status":"","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[24],"tags":[],"class_list":["post-48262","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-live-updates"],"acf":[],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.global-vtrader.com\/en\/wp-json\/wp\/v2\/posts\/48262","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.global-vtrader.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.global-vtrader.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.global-vtrader.com\/en\/wp-json\/wp\/v2\/users\/25"}],"replies":[{"embeddable":true,"href":"https:\/\/www.global-vtrader.com\/en\/wp-json\/wp\/v2\/comments?post=48262"}],"version-history":[{"count":0,"href":"https:\/\/www.global-vtrader.com\/en\/wp-json\/wp\/v2\/posts\/48262\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.global-vtrader.com\/en\/wp-json\/wp\/v2\/media\/47964"}],"wp:attachment":[{"href":"https:\/\/www.global-vtrader.com\/en\/wp-json\/wp\/v2\/media?parent=48262"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.global-vtrader.com\/en\/wp-json\/wp\/v2\/categories?post=48262"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.global-vtrader.com\/en\/wp-json\/wp\/v2\/tags?post=48262"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}