The University of Michigan’s final sentiment index for July is at 61.7, slightly down from the preliminary figure of 62.0. Last month’s index was 60.7, showing a small improvement. Current conditions have increased to 68.0 from a previous reading of 58.6. However, expectations fell to 57.7 from 66.8. Inflation expectations are also shifting. The one-year outlook rose to 4.5% from 4.4%. In contrast, the five-year outlook decreased to 3.4% from 3.6%. Overall, the economic data presents a mostly soft picture, reflecting how the market is reacting.

Market Anticipation Of Rate Cuts

The market expects 59 basis points of easing by the end of the year, up from an earlier 35 basis points before the NFP report. This shift shows growing concerns about possible delays by the Federal Reserve and suggests a need for larger rate cuts. There’s a significant gap in the latest July sentiment data. While people feel that current conditions have improved, their outlook for the future has sharply declined. This difference indicates rising economic anxiety. The market has quickly adjusted, now anticipating 59 basis points of Federal Reserve easing by year-end, up from 35 before the last jobs report. The recent Non-Farm Payrolls data for July 2025 showed a disappointing increase of 95,000 jobs, sparking fears that the Fed is lagging. This raises the belief that more substantial rate cuts are becoming necessary.

Focus On Interest Rate Derivatives

In the coming weeks, we should concentrate on interest rate derivatives, particularly futures linked to the Secured Overnight Financing Rate (SOFR). These instruments are likely to gain value as the market anticipates lower rates. This situation is similar to the late 2023 market activity when traders aggressively priced in a Fed policy shift. This uncertain environment may also lead to increased market volatility. The CBOE Volatility Index (VIX), which has been fairly stable around 17, might begin to rise. It could be wise to consider call options on the VIX to protect against or take advantage of potential market fluctuations. Given the decline in consumer expectations to 57.7, we should be cautious with equity investments. While rate cuts can help stocks, they often respond to a weakening economy that can hurt corporate profits. Buying protective put options on major market indices could be a smart way to manage downside risk. Create your live VT Markets account and start trading now.

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