Business and consumer sentiment in the US is declining, with indications that hard data may soon reflect this trend. Tariffs are creating a shock to the economy, causing a shift in focus from inflation to recession, leading to a decrease in the US Dollar’s value.
The ISM Index shows a rapid deterioration in sentiment among companies and consumers. Since “Liberation Day,” US stock markets have lost over 10% of their value, suggesting growing uncertainty regarding economic stability.
Market expectations indicate approximately 100 basis points of interest rate cuts from the Federal Reserve. This suggests that concerns about a potential recession are seen as more pressing than inflationary risks from increased tariffs.
Sentiment And Economic Indicators
What we’re seeing now is a situation where the mood among businesses and consumers in the United States has moved from uneasy to outright negative. The ISM Index, which tells us how manufacturing and services firms are feeling, is dropping quickly. It’s a forward-looking measure, and when it falls this fast, it tends to be followed by visible slowdowns in actual economic activity. So far, much of the weakness has been sentiment-led, but we expect more concrete economic data to start reflecting these doubts soon.
Since the point markets unofficially marked as “Liberation Day” — referring to what was then perceived as an economic turning point — equities have shed over 10%. That kind of movement tells us investors are reassessing the outlook, no longer prioritising inflation concerns, but rather starting to react to fears of an economic retreat. That in itself is a meaningful change, as inflation had previously been the centrepiece of nearly all central bank commentary this year.
In response, futures pricing in the rates market has taken a sharp turn. We’re now looking at forecasts that build in four standard quarter-point reductions from the Federal Reserve in the months ahead, totalling around 100 basis points. This isn’t a trivial shift. For this to be priced in, there has to be mounting confidence that the economy can’t sustain current policy conditions without slipping backward.
Volatility And Market Positioning
As traders, that naturally calls for a recalibration. There’s an opportunity in rates volatility across the curve, especially in the short-to-medium duration. Given what the market is currently pricing, any data that undershoots even modest expectations could accelerate the path towards the first cut. Conversely, if hard data holds up better than feared, we might see a temporary unwind of those expectations; but the sentiment already feels sticky.
From a volatility perspective, options markets are starting to reflect this angst. Implied vols on short-dated expiries have moved up, whereas longer out expiries remain more anchored. That mismatch suggests traders are bracing for near-term surprises, while still seeing the broader picture as manageable. For positioning, removing tail-risk bias and focusing on directional plays has been more effective. Yet if the next few CPI prints underwhelm, repricing will gather steam, and tail hedging could come back onto the table.
Currency traders saw the initial slump in the Dollar as a clear shift of narrative: from the US being the growth leader to potentially becoming a drag. Tariffs, which had once been talked about mostly in terms of driving inflation, are now being viewed more as a brake on global demand. That dynamic feeds directly into FX volatility and keeps pressure on carry trades on the long-Dollar leg.
With the US narrative shifting quickly, we’re watching European and Asian data much more closely than usual. Relative growth dynamics will likely matter more, not less, in the next few weeks. Traders should be prepared for choppier sessions and parity moves in formerly one-directional trades. The peak conviction of H1 has faded, and flexibility in strategy has become more of a requirement than an advantage.
Overall, the key is to remain highly responsive. Markets have moved from pricing a policy plateau to anticipating a full turn. That sort of reversal tends to shake confidence on positioning, and as we’ve seen before, when the crowd shifts, the exit can get crowded quickly.
