The US Manufacturing PMI flash reading is 49.5, which is lower than the expected 52.7. However, the Services PMI flash reading is 55.2, exceeding the forecast of 53.0. Last month’s readings were 52.9, while the composite flash was 54.6, up from 52.9 the previous month. The data indicates that the US economy grew at a 2.3% annualized rate at the beginning of the third quarter, an improvement from 1.3% in the second quarter. Still, this growth was uneven and heavily depended on the services sector, as manufacturing faced challenges due to diminishing benefits from tariff actions.

Business Confidence and Inflation Pressures

Business confidence in the future is down in both the manufacturing and services sectors, hitting a low point over the past two-and-a-half years. Concerns about government policies, including tariffs and cuts in federal spending, are affecting sentiment. Inflation is rising, driven by tariffs and higher labor costs due to shortages. In July, selling prices rose sharply, marking one of the highest increases in the past three years. This trend suggests consumer price inflation may continue to rise, potentially exceeding the Federal Reserve’s target of 2%. As prices climb, households will feel the effects, leading to further inflation. The current data shows a divided American economy, creating trading opportunities. Overall growth relies solely on the services sector, while manufacturing is contracting. This trend indicates an investment strategy that favors service-related companies over industrial and manufacturing sectors.

Economic Divergence and Trading Strategy

This two-track economy is confirmed by other recent reports. The May ISM Services PMI jumped to a solid 53.8, while the manufacturing PMI fell to a contractionary 48.7. We recommend traders consider long positions in services-focused ETFs and possibly short positions in industrial sector funds to take advantage of this widening gap. The data suggests this trend is speeding up. Mr. Williamson’s comments on falling business confidence raise important concerns. This decline in sentiment, linked to government policies and tariffs, indicates that it may be wise to seek downside protection. We should think about buying put options on broad market indices, such as the S&P 500, to guard against a possible downturn if these issues worsen. The growing inflation pressures he mentioned are significant, especially with core inflation staying above the Federal Reserve’s target. His forecast of rising consumer prices puts the central bank in a tough spot, possibly leading to a more aggressive approach than the market anticipates, despite a struggling manufacturing sector. This mix of economic divergence and possible central bank surprises creates a likely scenario for increased market volatility. Historically, such uncertainty has caused spikes in the VIX, as seen during the 2022 rate hike cycle. It would be wise to consider purchasing options that could benefit from increased volatility, such as VIX calls or straddles on major indices. Create your live VT Markets account and start trading now.

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