Inventory Levels and Supply Issues

The inventories-to-sales ratio dropped to 1.30 from 1.35 last year. This means there is less inventory compared to sales. It’s the lowest this ratio has been since 2022. If it keeps falling, we might face supply issues like we did after COVID when it hit 1.20, which led to higher prices. Tariffs could worsen supply problems and affect future prices. In June 2025, we saw that sales are increasing faster than inventory. This change caused the inventory-to-sales ratio to decline to 1.30, a level we haven’t seen since 2022’s recovery phase. This suggests businesses are running on thin supplies, making them vulnerable to supply disruptions. This tightening of inventory raises inflation concerns, supported by the July 2025 CPI report, which unexpectedly increased to 3.8%. We are closely monitoring whether the steady decrease in inflation we saw in early 2025 is starting to reverse. Upcoming inflation data will be crucial for market trends. The potential threat of tariffs is becoming a reality, adding to supply worries. Reports from late July confirmed that new tariffs on important imports, like auto parts, will start on October 1st. This could push the inventory-to-sales ratio down to around 1.20, a level that previously led to a sharp price rise after COVID.

Market Implications and Trade Strategies

As a result, the Federal Reserve is sounding more cautious and lowering expectations for interest rate cuts this year. The market’s anxiety is evident in the VIX, which has risen from its summer lows, indicating that traders are preparing for more volatility. We expect this uncertainty to increase as the market reassesses future Fed policies. For traders in derivatives, this is a good time to consider strategies that protect against rising inflation and interest rate risks. This might involve buying put options on major stock indices to guard against a possible economic slow down caused by higher rates. At the same time, call options on SOFR futures, which gain value when interest rates rise, are becoming a more sensible choice. We are also focusing on commodity derivatives, since supply-driven inflation usually raises raw material prices. The ‘prices paid’ index in the latest ISM manufacturing survey for July reached a one-year high, indicating that companies are already facing higher input costs. This suggests that call options on industrial metals or energy might perform well in the coming weeks. Create your live VT Markets account and start trading now.

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