Recent data indicates that GDP growth has slowed mainly due to lower consumer spending. On the bright side, business investment has increased during this time. Disinflation in service sectors continues, with job gains falling short of the breakeven rate. This suggests a drop in demand for labor. The likelihood of risks to employment has also grown.

Temporary Tariffs

It’s believed that current tariffs might be temporary, but they could still have long-lasting effects. Efforts are underway to make sure these one-time changes do not become a permanent problem. We’ve taken a step toward a neutral stance, allowing us to respond quickly to changes. Initial market movements reversed, with the US dollar returning to earlier levels. The Fed is hinting that its cycle of raising rates may be over. We are now more focused on *when* they will cut rates instead of *if* they will hike them again. The mixed signals from slowing consumer spending and rising business investment create a confusing environment for the market, leading us to anticipate more market volatility in the coming weeks. The chances of a rate cut by early 2026 seem to be growing, especially after the August 2025 jobs report, which showed a gain of only 85,000 jobs—far below the breakeven level. Derivative traders should keep an eye on SOFR and Fed Funds futures to adapt to this shift. The market expects at least two rate cuts by mid-next year.

Stock Market Implications

For stock indices, this situation is a double-edged sword. The chance of easier money is countered by the slowing economy causing it. This reminds us of the fourth quarter of 2018, when a pause by the Fed didn’t stop a slide in the equity market due to growth concerns. With added uncertainty from potential tariffs, purchasing VIX calls or using index option strangles could be a smart way to protect against a sudden market shift. The U.S. dollar quickly bounced back after its initial drop, indicating that the market isn’t fully convinced the Fed will cut rates before other central banks. However, if we see more weak data, like the recent 0.3% drop in August retail sales, the dollar may start to decline again. We might want to use options to prepare for a lower dollar, especially against currencies facing bigger inflation issues. With core services inflation now at a 3.2% annual rate, the risk of inflation speeding up again appears to be lessening. This mix of falling inflation and potential rate cuts is historically very good for gold. We should think about buying calls on gold futures or ETFs to take advantage of this situation. Create your live VT Markets account and start trading now.

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