The European session is quiet, featuring only the Eurozone current account data, which is a minor release. In the American session, the spotlight is on US Housing Starts and Building Permits, along with the University of Michigan Consumer Sentiment report. While housing data often gets overlooked, the main focus remains on employment and inflation metrics.

University Of Michigan Index Expectations

The University of Michigan index is expected to increase from 60.7 to 61.5. This rise in soft data is likely to continue due to recent legislative changes and reduced uncertainty around tariffs. The survey’s inflation expectations are also noteworthy, as they have fallen from their peak in April. This decline is part of a larger economic trend. Current data does not indicate that the Federal Reserve will cut rates in July, despite varied opinions on this. There’s no evidence suggesting an imminent change in interest rates. We view the latest University of Michigan sentiment report as a significant indicator for the coming weeks. It unexpectedly dropped to 65.6, marking a seven-month low and showing that consumers are more concerned about the economy than expected. This weakness hints that buying protective put options on equity indices like the S&P 500 may be a wise choice to safeguard against a potential market decline.

Inflation Expectations And Market Implications

The survey’s inflation expectations are also crucial; they haven’t decreased. The one-year outlook is stuck at a high 3.3%. This gives the central bank reason to keep interest rates high. For traders, this stickiness means that bets on quick rate cuts may not work, making strategies focused on sustained higher rates more attractive. Mr. Waller’s caution is supported by the Fed’s latest “dot plot,” which now projects only one rate cut in 2024, a significant decrease from three cuts expected in March. With no strong data suggesting a change, a July rate cut seems unlikely. This situation makes selling call options on rate-sensitive assets potentially profitable, as there’s no immediate bullish factor. Historical data shows that the current low market volatility, with the VIX index around 13, is significant. This calm often precedes a major market shift when the economic direction becomes clearer. Such an environment makes it relatively affordable to buy longer-term options, preparing for a potential surge in volatility later this year. Create your live VT Markets account and start trading now.

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