US private sector business activity grew in February, but at a slower pace than in January, according to S&P Global’s preliminary Composite PMI. The index slipped to 52.3 from 53.0. The Manufacturing PMI fell to 51.2 from 52.4, and the Services PMI edged down to 52.3 from 52.7. Both figures came in slightly below analyst estimates.

Drivers Of The February Slowdown

S&P Global cited weaker demand, high prices, and bad weather as key drags on activity in February. Output growth was the slowest in 10 months. Factory orders declined, and job growth eased in both manufacturing and services. The US Dollar Index did not react right away. It was last up 0.12% on the day at 97.95. Because activity slowed more than expected, we should temper our view of overall economic strength. The pullback in both manufacturing and services suggests the strong growth seen in late 2025 is starting to cool. The drop in new factory orders, in particular, points to softer corporate earnings ahead. This report also affects our view on Federal Reserve policy. After the last FOMC meeting left rates unchanged, weaker activity makes another rate hike less likely. It also raises the chance of a rate cut later this year. This is already showing up in Fed Funds futures, where the probability of a fourth-quarter rate cut has risen to above 50%.

Positioning Implications For Markets

Over the next few weeks, we should consider buying volatility because this report adds uncertainty. The VIX has been hovering near 14. At the same time, January CPI remains elevated at 3.1%. Slower growth plus sticky inflation is a tension point for markets and can trigger a volatility spike. That makes VIX call options, or calls on other volatility products, more appealing. In equities, a more defensive stance makes sense, especially in cyclical sectors. Consider put options on industrial and materials ETFs as a hedge against weaker factory demand. Services are holding up better, but slower hiring across both sectors is a warning sign for consumer spending. Even though the US Dollar Index was flat today, the broader message is dollar-negative. A softer economy and the prospect of earlier Fed cuts typically reduce the dollar’s appeal. One potential trade is positioning for a weaker dollar against currencies backed by more hawkish central banks—for example, via euro call options. Overall, the strong rebound that shaped much of 2025 appears to be losing momentum as we move through Q1 2026. This slowdown looks like prior mid-cycle pullbacks, when Treasury yields often fall. The 10-year Treasury yield, now around 4.15%, could retest 4.0%, which may create opportunities in bond futures. Create your live VT Markets account and start trading now.

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