The S&P Global Manufacturing PMI for July was 49.8, showing a slight contraction in the U.S. manufacturing sector, marking the first decline of 2025. This is a drop from June’s 52.9 and ends a time of steady growth.

Employment Drop

In July, market demand stalled. New orders increased only a bit, while new export orders fell, particularly in sales to China, the EU, and Japan. Concerns about trade policy affected business confidence and decision-making. For the first time since April, employment levels fell as companies hesitated to hire due to low demand and rising costs. Firms began relying less on their inventories, and stockpiles linked to tariffs decreased. While input costs continued to be high due to tariffs, inflationary pressures eased from June’s peak. Selling prices kept rising, marking the second-largest increase since November 2022. Output growth slowed and remained minimal. Business confidence fell to a three-month low, but firms expect output to rise in the upcoming year. Supply chain conditions improved slightly, with shorter delivery times due to better stock availability and fewer vendor backlogs. Overall, July’s data points to challenges in the manufacturing sector, such as stagnant demand and policy uncertainties. However, there is hope for stabilization thanks to easing inflation and improved supply chain conditions.

Market Strategies

The manufacturing PMI’s drop to 49.8 indicates the first contraction of 2025, a sign of significant slowdown. Falling below the crucial 50.0 mark is similar to August 2019, when the ISM index hit 49.1 amid tariff concerns leading to a market slowdown. In response, we should consider taking bearish positions in sectors that are heavily influenced by manufacturing cycles, like industrials (XLI) and materials (XLB). The stagnation in new orders and the drop in inventories are major obstacles for economic growth in the third quarter. This inventory reduction typically slows GDP growth; U.S. business inventories-to-sales ratios exceeded 1.40 in late 2022, and the following work-down period cooled the economy. We should expect this trend to negatively impact the broader market, making put options on the Russell 2000 (RUT), which is sensitive to the U.S. economy, a smart hedge. Although input cost pressures are lessening, the ongoing rise in selling prices suggests stubborn inflation. This situation of slowing growth with persistent price increases complicates the Federal Reserve’s decision-making and may delay any expected rate cuts. Such policy uncertainties often lead to increased market volatility, indicating that it might be wise to buy VIX call options in the coming weeks as a safeguard for our portfolio. The report highlights a decrease in export orders to China and the EU, signaling a weakening demand globally. Historically, during global economic challenges, the U.S. Dollar serves as a safe-haven asset, as demonstrated by the Dollar Index (DXY) rising over 15% through mid-2022. We should keep an eye on a strengthening dollar, as this would further impact earnings for U.S. multinational companies. Given the mixed signals of a slight contraction but improving supply chains, an aggressive short position may be risky. A better approach would be to use bearish debit spreads on the S&P 500 (SPX) with expirations in late August or September. This strategy allows us to benefit from a potential small decline while clearly setting our maximum risk if the market remains strong. Create your live VT Markets account and start trading now.

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