The University of Michigan’s final report on consumer sentiment for August is 58.2, which is a bit lower than the preliminary estimate of 58.6. This marks a decrease from July’s level of 61.7. The current conditions score is now 61.7, up from the preliminary 60.9. Inflation expectations for the coming year are at 4.8%, down from the earlier estimate of 4.9%. The five-year inflation forecast has also dropped to 3.5% from 3.9%. While these expectations remain higher than last month, they have been revised downwards.

Impact on Economic Outlook

Many economic feedbacks have fallen, with purchasing conditions for durable goods hitting a yearly low. In August, assessments of business conditions and labor markets also declined. However, expectations for personal finances stayed stable, though they remain lower than last year’s levels. The final consumer sentiment reading for August, at 58.2, indicates a cooling off among US consumers. The decrease in expectations for business and labor conditions shows that households are becoming more cautious. As a result, we might consider protective strategies like buying put options on consumer discretionary ETFs, such as the XLY, which tend to react to reduced spending. Recent data supports this notion of consumer weakness. For instance, the July retail sales report revealed an unexpected decline of 0.4%, while most analysts had predicted a slight increase. Major retailers like Target and Lowe’s also provided careful outlooks during their recent earnings calls, mentioning slower customer visits. This real-world evidence suggests a weakening consumer, making bearish strategies more appealing.

Fed Policy and Market Strategy

The downward revision of the five-year inflation expectation to 3.5% is important. It signals that consumers think long-term inflation is stabilizing, which aligns with the Federal Reserve’s recent message that its policies are effective. This follows the latest Core PCE reading for July, which remained steady at 3.2%. Although inflation progress is slow, it hasn’t reversed. Easing inflation pressures reduce the likelihood of another rate hike by the Fed, with futures markets now indicating only a 15% chance of an increase in September. A less aggressive Fed generally supports interest-rate-sensitive assets. This situation could present an opportunity to buy call options on bond ETFs like TLT, anticipating that yields may have peaked for this cycle. A similar trend occurred in late 2023, when weakening economic data appeared alongside falling inflation. This led to market volatility before the Fed signaled a shift in policy. Given that context, buying straddles or strangles on the SPX may be a smart way to navigate the expected uncertainty in the coming weeks. Create your live VT Markets account and start trading now.

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