US gross domestic product grew at an annualised 1.6% in the first quarter, coming in below the 2% market expectation. The softer print points to a slower pace of expansion at the start of the year.
The latest estimate adds to a run of data that has tested assumptions about the economy’s momentum, and it will feed into debates over the outlook for activity. Attention now turns to whether subsequent releases confirm a temporary dip or a more persistent cooling trend.
Federal Reserve Policy and Market Positioning
With the Q1 Gross Domestic Product coming in soft at 1.6%, we see this as a clear signal that the economy is cooling faster than anticipated. This miss significantly alters the landscape for Federal Reserve policy in the months ahead. It pressures the Fed to reconsider its hawkish stance as the risk to growth now appears more immediate than the risk of inflation reaccelerating.
This data point directly impacts our view on interest rates, and we are adjusting our positions accordingly. The probability of a rate cut by the September meeting has now jumped to over 65%, according to pricing in the Fed funds futures market. We are looking at buying options on Treasury bond ETFs like TLT or using SOFR futures to position for lower rates through the end of the year.
Implications for Equities, Volatility, and the U.S. Dollar
For equity markets, this slowing growth introduces a new wave of uncertainty, which means we should anticipate higher volatility. The CBOE Volatility Index (VIX) is currently sitting near 14, a historically low level that presents a cheap opportunity to buy protection. We are adding to our long volatility positions and purchasing put options on the S&P 500 to hedge against potential downside as earnings estimates get revised lower.
The U.S. dollar is also likely to weaken as rate cut expectations solidify. A less aggressive Fed makes the dollar less attractive compared to other currencies where central banks may not be easing as quickly. We are using futures and options to take short positions on the U.S. Dollar Index (DXY).
We must also consider that the latest Consumer Price Index reading was still above the Fed’s target at 3.2%, creating a difficult situation for policymakers. This mirrors past cycles, like in 2019, where the Fed pivoted from a tightening bias to cutting rates as economic data softened, even with inflation not fully at its target. The weak GDP figure is the first strong piece of evidence that a similar pivot is now the most likely path forward.
