The New York Federal Reserve Bank’s May Survey of Consumer Expectations (SCE) shows households anticipate a marginal easing in inflation over the next year, even as the Middle East conflict adds upward pressure. Median 12-month inflation expectations edged down to 3.5% from 3.6%, while longer-run views were unchanged at 3.1% over three years and 3% over five years.
The survey also points to softer sentiment on credit and employment prospects. Expectations for future credit availability deteriorated, with only a minority expecting it to become easier to obtain credit over the coming year. Separately, the mean perceived probability of finding a job after being laid off fell to 43.7%; that sits below the 12-month average of 46.8% and marks the lowest level since December.
Market Caution Amid Conflicting Signals
Based on this consumer data, we see the market grappling with conflicting signals, which suggests a cautious approach in the coming weeks. The slight dip in one-year inflation expectations to 3.5% is noted, but the stickiness of longer-term expectations supports the Federal Reserve’s “higher for longer” interest rate stance. Therefore, we are hesitant to position for aggressive rate cuts and will focus on strategies that benefit from a range-bound market.
The weakening consumer outlook on the job market and credit is a significant red flag for economic growth. This consumer pessimism aligns with the latest May 2026 jobs report, which showed nonfarm payroll growth slowing to just 155,000, missing analyst expectations. We interpret this as a leading indicator of reduced consumer spending, prompting us to consider defensive positions in equity index derivatives.
Risk Mitigation Strategies and Defensive Positioning
Given these factors, we are looking to buy protection against a potential market downturn. The CBOE Volatility Index (VIX) is currently trading near a relatively low level of 14, which we believe does not fully price in the risk of an economic slowdown hinted at by this survey. We will be purchasing put options on the SPDR S&P 500 ETF (SPY) and call options on the VIX to hedge our portfolios against a rise in volatility.
The tightening of credit availability, a classic precursor to economic slowdowns, reinforces our defensive posture. Historically, when consumers and businesses find it harder to borrow, economic activity contracts within the following two quarters. We are therefore reducing our exposure to cyclical sectors and using options to create bearish positions on financial sector ETFs, which are sensitive to credit conditions.
For interest rate derivatives, the persistent core inflation, which last printed at 3.4%, means the Fed has little room to ease policy. We expect the yield curve to remain relatively flat as the market waits for more definitive data on either inflation or employment. We are positioning in options on Secured Overnight Financing Rate (SOFR) futures that will profit if short-term rates remain stable through the third quarter.
