The New York Empire State Manufacturing Index in the United States came in at 19.6 in May. This was above expectations of 7.5.
We are seeing a significant surprise with the May manufacturing data coming in at 19.6, far exceeding the 7.5 we were expecting. This suggests the economy has much more momentum than previously thought. This strength challenges the narrative that the economy was cooling enough to warrant imminent rate cuts.
Fed Policy Implications
This robust data point makes the Federal Reserve’s job more complex, likely pushing any potential interest rate cuts further into the future. We should now anticipate a more hawkish tone from policymakers, reinforcing the “higher for longer” scenario. The odds of a rate cut this summer, as tracked by CME Fed Funds futures, have likely dropped significantly following this release.
For equity index traders, this creates a tug-of-war, with strong economic activity supporting corporate earnings but higher potential interest rates pressuring valuations. Given the sharp market pullbacks we saw in response to stubborn inflation during 2025, we should consider buying protection via puts on the S&P 500. Expect the VIX, which has been trending near its lows around 13, to see a notable increase as this new uncertainty is priced in.
In the rates market, we should anticipate a sell-off in U.S. Treasuries, pushing yields higher across the curve. The 10-year Treasury yield, which had been steady around 4.50%, is likely to re-test its recent highs. Derivative strategies should focus on shorting Treasury futures or buying puts on bond ETFs to capitalize on this expected move.
This news is decidedly bullish for the U.S. dollar, as higher relative interest rate expectations make the currency more attractive. The Dollar Index (DXY) will likely find strong support and rally against currencies whose central banks remain more dovish. We should look to establish long positions in USD futures or call options against the Euro and Yen.
