US capacity utilisation was 76.1% in April. This was above the forecast of 75.8%.
The higher-than-expected capacity utilization figure for April suggests the industrial side of the economy is running hotter than we previously believed. This data point challenges the narrative that the Federal Reserve has a clear path to begin cutting interest rates this summer. We must now adjust our expectations, as this strength could point to persistent underlying inflation.
Given this, the probability of a rate cut at the upcoming June or July FOMC meetings is now lower. Fed funds futures have already reacted, with the market now pricing in only a 40% chance of a cut by the end of the third quarter, a sharp drop from the 70% chance priced in last month. We should anticipate further upward pressure on short-term yields, making bearish positions on Treasury futures more attractive.
For equity index traders, this creates a tricky environment where good economic news could be interpreted as bad news for the market. We anticipate a rise in volatility as traders re-evaluate Fed policy. The VIX index, which has been sitting below 14 for weeks, could see a sustained move back toward the 18 level as this uncertainty is priced in.
This is a clear signal to overweight cyclical sectors that benefit from robust economic activity while underweighting rate-sensitive ones. We see opportunity in call options on industrial and material ETFs, which directly profit from increased manufacturing output. Conversely, put options on utilities and real estate sectors could perform well if yields continue to climb.
This strength in U.S. manufacturing also implies a stronger demand for commodities like copper and oil, supporting a bullish outlook for those markets. Looking back to the economic resilience of 2025, we remember how quickly a hawkish Fed pivot can strengthen the U.S. dollar. Therefore, long positions in the U.S. dollar against currencies with more dovish central banks also look increasingly compelling.
