The University of Michigan reported that the consumer sentiment index for July 2025 rose slightly to 61.8, above the expected 61.5 and higher than June’s 60.7. However, it is still 16% lower than December 2024. The expectations index increased to 58.6 from an estimated 55.0, up from 58.1 last month. The current conditions index improved to 66.8, beating the 63.9 estimate, and rising from 64.8 in the previous month.

Inflation Expectations

Inflation expectations for the next year dropped significantly to 4.4%, down from 5.0% last month. Five-year inflation expectations also fell to 3.6% from 4.0%, reaching their lowest levels since February 2025. Even with better inflation expectations, they are still higher than December 2024 levels, showing that consumers are still worried about inflation. Short-term business conditions improved by 8%, but expected personal finances fell by 4%, reflecting mixed feelings among consumers. Overall, inflation worries are still affecting consumer sentiment, with fears lingering partly due to tariff issues. Recent policies, like the tax and spending bill, haven’t changed sentiment much. With falling inflation expectations, we expect the Federal Reserve will feel less pressure to act aggressively in the coming months. This change reduces the chance of surprise rate hikes, which should benefit stocks and bonds. Derivative traders should prepare for a market that is less anxious about monetary policy.

Market Strategies

We see this as a chance to prepare for a small rally or stable price movements in the major indices. Instead of buying expensive outright calls, selling out-of-the-money puts or using bull put spreads on the S&P 500 can help you earn premiums. The market’s reaction to the last CPI report, which showed core inflation at a two-year low of 3.8%, suggests that declining inflation is creating a safety net for stocks. Hsu pointed out that consumer confidence is still fragile, which will likely limit big price increases and keep volatility in check. The CBOE Volatility Index (VIX) probably won’t return to historical averages below 19 as sentiment stays below long-term norms. This makes selling volatility through strategies like iron condors appealing, as they profit from stable price movements. For interest rate products, the notable drop in year-ahead inflation expectations is key. We expect yields on the 2-year Treasury note to decrease as the market adjusts to fewer future hikes. Looking back to 2023, when inflation expectations first dropped sharply, bond prices rose significantly before stocks followed suit. While the data is promising, the weakness in personal finance expectations and ongoing tariff concerns are important risks. This suggests that any long positions should be hedged, maybe by buying inexpensive, far out-of-the-money puts for protection. The market is moving from a state of high fear to cautious optimism, and strategies should reflect this gradual change. Create your live VT Markets account and start trading now.

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