US business inventories rose by 0.9% in March. The forecast was 0.8%.
The March figure was 0.1 percentage points above expectations. This indicates stock levels increased slightly more than predicted.
The recent data shows March business inventories rose by 0.9%, a touch higher than the 0.8% we anticipated. This slight build-up, when paired with the latest retail sales report for April which came in flat, suggests that consumer demand may be slowing faster than businesses expected. This is a classic early warning sign that could lead to production cutbacks in the coming months.
This cooling demand is occurring as we see inflation finally easing, with the last CPI report showing core inflation at a 3.2% annual rate, its lowest point since late 2024. The Federal Reserve has signaled it is watching this kind of data closely, creating uncertainty about the timing of any future rate adjustments. We believe this environment is ripe for an increase in market volatility.
Given this outlook, we see opportunities in purchasing protection and betting on wider price swings. The VIX, which measures expected volatility, has already crept up from 14 to just under 19 in the past month. We are considering buying call options on the VIX or establishing put spreads on major indices like the S&P 500 to hedge against a potential downturn.
We are also watching sector-specific weaknesses, particularly in consumer discretionary and industrial goods where inventories often build first. This pattern is reminiscent of the second quarter of 2025, which saw a similar inventory build precede a sharp, albeit brief, market correction. Buying puts on ETFs like XLY and XLI could prove effective if that history repeats.
