The Richmond Fed’s composite index for August was -7, which is better than the expected -11 and an improvement from last month’s -20. The services index rose to 4, up from 2 the previous month, while manufacturing shipments improved to -5 from -18. In the business sector, eight indicators went up month-over-month, three went down, and one stayed the same. Employment and wages grew compared to last month; however, there was a decline in the availability of necessary skills.

Surge In Prices Paid

Prices paid saw a significant increase, jumping from 5.65 to 7.24. In contrast, prices received remained steady at 3.14. The August 2025 data from the Richmond Fed is better than expected, showing that economic activity is slowing down less than before. However, the critical point is that the costs companies are paying for goods have risen sharply. This situation puts pressure on corporate profits, as the prices they receive for their products have not changed. This report complicates the outlook for interest rates and the Federal Reserve’s decisions. National inflation is sticking around 3.4% this year, and the sharp rise in regional input costs may make the Fed hesitant to lower rates. Traders should expect lower chances of a rate cut before the end of 2025, which might strengthen the dollar and put pressure on bonds. For S&P 500 equity index options, this creates a challenging situation. A similar period of margin compression hurt stocks in 2022, so it seems wise to hedge against a possible drop in corporate earnings. This could involve buying put options or selling call spreads to protect against downside risks from disappointing profit reports next quarter.

Sector Performance Divergence

There is a noticeable divide between the improving services sector and the struggling manufacturing sector. The report suggests that services are growing, indicating ongoing strength in consumer-focused areas of the economy. This may lead us to prefer bullish positions on consumer discretionary stocks rather than industrial ones in the upcoming weeks. Overall, this combination of rising activity and cost pressures increases uncertainty. The VIX, a measure of expected market volatility, has been around historic lows of about 13 for most of the summer. This report could trigger a spike in volatility, making long positions in VIX call options a potentially good hedge against broader market turbulence. Create your live VT Markets account and start trading now.

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