US durable goods orders excluding defence fell by 1.2% in February. This compares with a 0.5% rise in the previous period.
The February report showing a 1.2% drop in durable goods orders, excluding defense, confirms the economic cooling we have been watching for. This reversal from the slight growth seen in January suggests businesses are now pulling back on major investments. This is a clear signal that the higher interest rates from 2025 are finally starting to impact corporate spending plans.
Signs Of Economic Cooling
This weak business spending data, combined with recent online reports showing a dip in consumer confidence indices for March, paints a picture of a slowing economy. The March jobs report, released last Friday, also supported this by showing a moderation in wage growth to its slowest pace in over a year. We see this as a consistent trend of economic deceleration heading into the second quarter.
As a result, the probability of the Federal Reserve raising interest rates again in its May meeting has fallen dramatically. Current market pricing derived from Fed funds futures now indicates a greater than 60% chance that the Fed will hold rates steady, a sharp turnaround from the hawkish sentiment we saw late last year. This pivot in expectations is the most critical factor for our strategy in the coming weeks.
For equity derivatives, we should consider hedging against a potential market downturn, as slowing growth could impact corporate earnings. Buying put options on broad market indices like the S&P 500 or on cyclical sector ETFs offers a way to protect portfolios. With the VIX, a measure of expected market volatility, having recently climbed from 14 to 18, the cost of this insurance is rising, suggesting we should act soon.
In the interest rate markets, this data reinforces the view that bond yields may have peaked. We could use options on Treasury note futures to position for falling interest rates as the market begins to anticipate eventual rate cuts later this year. Looking back at similar economic slowdowns, like the one in 2019, defensive government bonds tended to perform well as investors sought safety.
This outlook also has implications for currency markets, as a less aggressive Federal Reserve typically weakens the U.S. dollar. We could explore strategies that benefit from a declining dollar, such as buying call options on the euro or Japanese yen. The U.S. Dollar Index (DXY) has already fallen 2% over the last three weeks, and this fundamental data provides a strong reason for that weakness to persist.
