The Atlanta Fed has lowered its GDPNow tracker for Q3 from 3.5% to 3.0%. This change is based on new information from the US Census Bureau and the Institute for Supply Management. As a result, the forecasts for real personal consumption expenditures and real gross private domestic investment growth for the third quarter have been updated.

Increasing Impact of Inventory Investment

On the upside, the prediction for inventory investment’s contribution to third-quarter real GDP growth has increased from 0.59 percentage points to 0.69 percentage points. This change indicates that the economy is slowing down more quickly than expected. Consequently, our outlook on Federal Reserve policy for the remainder of the year is shifting. There is now a greater chance that the Fed will pause its cycle of raising interest rates. The expectation for a rate hike in November has fallen from 55% to 35% in overnight swaps following this news. In light of this, we should explore interest rate derivatives that could benefit from a more dovish Fed. One option is to buy December 2025 SOFR futures, which could gain value if future hikes are priced out. The latest CPI data from August 15th showed core inflation dropping to 2.9%, giving the central bank a reason to pause.

Possible Pressure on Corporate Earnings

For stocks, the reduced growth outlook suggests that corporate earnings may face pressure. It might be wise to purchase protective puts on the S&P 500 with October expirations to shield against a downturn. The most recent non-farm payroll report indicated job growth slowing to 155,000, reinforcing concerns about waning economic momentum. This change in the economic landscape increases uncertainty, especially with the FOMC meeting scheduled for September 20th. We should expect higher market volatility. Buying VIX call options is a straightforward way to prepare for this anticipated increase in market fluctuations. The data also highlights weaknesses in consumer spending and business investment, making certain sectors particularly vulnerable. It would be wise to use options to take a bearish stance on consumer discretionary ETFs. Conversely, we have seen defensive sectors, like utilities, perform well during similar slowdowns in 2023 and 2024. We have encountered similar scenarios before, where declining growth forecasts prompted the Fed to shift from a hawkish stance. Reflecting on the market’s behavior in late 2018, the Fed’s pause led to a significant rally in fixed income and a volatile but ultimately positive reaction in stocks. This historical backdrop suggests we should be ready for sharp market movements in the upcoming weeks. Create your live VT Markets account and start trading now.

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