US industrial production rose 0.7% month on month in April. The forecast was 0.3%.
This strong industrial production number is a clear signal that the economy has more momentum than many believed. The 0.7% month-over-month increase directly challenges the narrative of a slowdown that would justify near-term interest rate cuts. We must now adjust our expectations for Federal Reserve policy in the coming months.
The immediate effect will likely be seen in interest rate markets, as this data makes the Fed’s job more complicated, especially with April’s CPI inflation reading still holding at a sticky 3.1%. We should expect futures markets to price out the probability of a rate cut before the fourth quarter. As of this morning, fed fund futures have already shifted the odds of a September cut from over 60% just last week to below 30%.
Given this, we should consider positions that benefit from higher-for-longer interest rates. Buying put options on long-duration bond ETFs is a straightforward strategy to capitalize on rising yields. We saw a similar pattern back in late 2023 when robust economic data repeatedly pushed back expectations for the first Fed rate cut, causing significant losses for those positioned for an early pivot.
For equities, this points to strength in cyclical sectors that are sensitive to economic growth. We should look at call options on industrial and materials ETFs to gain exposure to this surprising manufacturing strength. This data reinforces the recent S&P Global US Manufacturing PMI, which ticked up to 52.5, its highest level in over a year.
This also means we need to be cautious about volatility. While strong economic news can initially calm markets, the resulting uncertainty around Fed policy could lead to sharp repricing events. We should avoid being aggressively short volatility, as a hawkish turn in commentary from Fed officials could cause the VIX to spike.
