US Federal Reserve data for the Kansas City region showed manufacturing activity at -9 in May. This was up from -10 in the previous month.
A negative reading indicates contraction in overall factory activity in the district. The May figure suggests slightly less contraction than the prior month.
Manufacturing Activity Still Contracting
The May manufacturing reading shows continued contraction at -9, which is still well below the threshold for growth. However, this is a slight improvement from the -10 we saw in April. This suggests that while outright bearish bets are logical, the momentum of the decline may be slowing down.
This weak economic data comes as the latest Consumer Price Index report showed core inflation remains persistent, hovering around 3.1% in April 2026. We are seeing traders increase bets on a Federal Reserve rate cut later this year, with December 2026 SOFR futures contracts gaining value. The market is now pricing in a greater chance the Fed will act to support the economy, even if inflation isn’t fully contained.
We should look at options on industrial sector ETFs, as these companies are most directly affected by manufacturing activity. Buying protective put options can hedge against further weakness, but the slight improvement in the data also makes selling call spreads an attractive strategy to capture premium. This approach is reminiscent of the trading environment we saw in 2025 when the economy was also adjusting to the lagged effects of earlier Fed policy.
This kind of conflicting signal, showing both weakness and a marginal improvement, often adds to market uncertainty.
Positioning For Higher Volatility
We anticipate a potential rise in the VIX index, which has been trading near its historical lows recently. Call options on the VIX could serve as an inexpensive hedge for a broader portfolio against any sudden economic shocks in the next few weeks.
