US durable goods orders excluding transport rose by 0.8% in February. The forecast was 0.5%.
This stronger-than-expected data on business investment suggests the economy has more underlying momentum than previously thought. This report, combined with the March non-farm payrolls that showed a robust addition of 295,000 jobs, challenges the narrative for imminent Federal Reserve rate cuts. We believe the market will now have to reconsider the timing and magnitude of any easing cycle previously anticipated for the summer.
Rates Higher For Longer
Given this, we see opportunities in interest rate derivatives that bet on rates staying higher for longer. The odds of a June rate cut have likely diminished, making selling June or September 2026 SOFR futures an attractive position. This play is based on the expectation that the Fed will signal a more patient, data-dependent stance in its upcoming communications.
For equity indices, the news is a double-edged sword, likely creating volatility. While strong business spending is good for corporate earnings, the threat of delayed rate cuts could pressure valuations, particularly in the tech sector. Therefore, we are considering buying put spreads on the Nasdaq 100 index as a hedge against a market pullback driven by interest rate fears.
This economic strength should also translate to a stronger U.S. dollar. After the recent core CPI data showed inflation remaining sticky at 3.1%, the case for dollar-denominated assets improves relative to other currencies. We are looking at buying call options on the U.S. Dollar Index (DXY) to capitalize on a potential move higher, especially against the Euro.
This situation reminds us of the environment back in 2024, when persistently strong economic figures repeatedly forced the market to push back its rate cut expectations. With the VIX, a measure of market volatility, having recently traded at a low of 14, options premiums are relatively cheap. Buying some form of portfolio protection now seems prudent before the market fully digests this shift.
