The Atlanta Fed has raised its GDP growth estimate for the second quarter from 2.4% to 2.9% as of July 25. This is the final estimate for Q2, with the US GDP numbers set to be released at 8:30 AM ET the next day. On July 29, the GDPNow model indicated a real GDP growth rate of 2.9% for Q2. Although gross private domestic investment growth fell from -11.7% to -12.7%, an increase in the net exports’ contribution to GDP growth rose from 3.31 percentage points to 4.04 percentage points.

Third Quarter Estimate

The next GDPNow update on July 31 will give the first estimate for the third quarter. A Reuters survey with 83 participants estimates the advanced GDP median at 2.4%, with predictions ranging from 0.8% to 4.5%. We observe a difference between the Atlanta Fed’s final GDPNow estimate of 2.9% and the market consensus of 2.4%. This gap creates an opportunity for volatility around tomorrow’s 8:30 AM ET data release. The wide range of 0.8% to 4.5% in the Reuters survey shows uncertainty in the market that we can take advantage of. If the official number is closer to 2.9%, it indicates a stronger economy, which could raise inflation concerns. Given that the core PCE inflation figures for June 2025 are at 3.1%, a strong GDP report may lead to higher Treasury yields. We expect the 10-year Treasury yield, currently at 4.15%, to test recent highs around 4.30%. To prepare for this, we plan to buy short-term VIX call options set to expire in August, since a sharp market reaction could see the VIX rise from its current low of 14. We are also looking at straddles on the SPDR S&P 500 ETF (SPY) to benefit from a significant price move, no matter which direction it takes. The market tends to react sharply to unexpected economic signals.

Federal Reserve Rate Implications

Looking ahead, a strong GDP figure would challenge the market’s expectations of a Federal Reserve rate cut in September. Current Fed funds futures show a 65% chance of a 25-basis-point cut; this could drop below 40% quickly if the GDP number is strong. This offers a chance to prepare for a more aggressive Fed in the coming weeks. We saw a similar trend in late 2023 when strong economic data pushed back expectations for rate cuts, causing volatility in both equity and bond markets. Therefore, we are considering buying longer-term put options on interest-rate-sensitive investments, like the iShares 20+ Year Treasury Bond ETF (TLT). This could help us hedge or speculate on a “higher-for-longer” rate outlook. If the GDP figure falls at or below the 2.4% consensus, we expect a relief rally as rate-cut expectations strengthen. In that scenario, we should quickly close our short-term volatility positions to capture the initial movement. The main risk is if the GDP number matches the consensus too closely, which could result in a muted market reaction and a decline in the value of our options. Create your live VT Markets account and start trading now.

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