The Chicago Purchasing Managers’ Index (PMI) for December was 43.5, which is better than the expected 39.5. This indicates that the manufacturing sector in the region is performing better than anticipated. The PMI is an important measure of economic activity. A higher PMI means stronger manufacturing output. This improvement can affect various economic decisions and future market strategies.

Economic Implications

The December Chicago PMI report of 43.5 is much better than the predicted 39.5. Although this number still shows a decline in manufacturing, the unexpected increase suggests the economic slowdown may not be as bad as previously thought. This could lead to a reevaluation of concerns about a severe downturn. This information is especially relevant given the fourth quarter of 2025, which saw slow GDP growth and a rise in jobless claims over 240,000 per week in November. The market has been anticipating substantial cuts to the Federal Reserve’s interest rates early in 2026 due to this weakness. A stronger manufacturing report, even if it still indicates contraction, may lead us to adjust these expectations slightly. For those involved in trading equity derivatives, this could be a sign to lower downside protection for the near future. Selling some out-of-the-money puts on the S&P 500 set to expire in January could be a good way to earn some premium. The VIX index, which is around 21, is likely to decrease with this news, making it cheaper to buy long-term protection for later in the first quarter.

Market Strategy Adjustments

Reflecting on the slowdown in 2023, there were several moments when regional data briefly improved before falling again. Therefore, it is wise to view this as just one data point rather than a confirmed turnaround. Hedging any new bullish positions with inexpensive VIX calls for February or March could be a smart strategy. In the interest rate markets, we might see a slight drop in short-term bond prices, which would push yields up. Traders may reduce their expectations for a 50-basis-point cut from the Fed in March, leaning more toward a 25-basis-point move instead. This could be reflected in adjustments to positions in SOFR futures, indicating a less aggressive approach. Create your live VT Markets account and start trading now.

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