The market is waiting hard for the Federal Reserve's decision. Derivatives trading pricing shows that US stocks may experience large fluctuations, and bears are gathering in the bond market, and bearish sentiment is strong.

At 2:00 a.m. on Thursday, Beijing time, the Federal Reserve will announce the FOMC interest rate decision. Powell will hold a monetary policy press conference half an hour after the interest rate decision is announced.

According to Citibank, based on pricing implicit in the options market's “affordable arbitrage” trading strategy, the S&P 500 index is expected to fluctuate 0.95% on that day, which will be the biggest fluctuation on the Fed's decision date since May 2023.

Moreover, Citi also pointed out that options traders have always underestimated the actual fluctuation when predicting fluctuations in the S&P 500 index on the day of the Federal Reserve's decision. Since the beginning of 2022, the S&P 500's fluctuations on every Fed decision day have surpassed expectations for the “parity arbitrage” strategy.

Furthermore, bearish sentiment in the bond market has intensified.

Bears gather in the bond market

Futures market data for the week ending April 23 shows that hedge funds and commodity trading advisors (CTAs), etc. have established a large number of short positions on bonds. In the words of Bank of America strategists, it is in a state of “almost the largest short position.”

In the cash market, J.P. Morgan's latest customer survey also showed that bearish bets reached a three-week high. At the same time, the SOFR options market also shows that investors have increased their holdings at certain execution prices, which indicates that market participants have clearly bearish views on the upcoming bond market trend.

As the US economy remains resilient and inflation is stubborn, the market continues to lower expectations that the Federal Reserve will cut interest rates this year. At the beginning of this year, the market also anticipated that the Federal Reserve would cut interest rates several times this year. Currently, the market expects to cut interest rates by 0.25 percentage points only once this year, and some people are even beginning to question whether the Federal Reserve will take any action.

Federal Reserve officials, including Powell, have said in recent weeks that if economic data continues to be strong, they are willing to maintain high interest rates for a longer period of time. Investors expect Powell to restate this position after the FOMC meeting this week.

In the midst of continuously lowered interest rate cuts, US bonds experienced the worst sell-off since July last year in April.

However, there are also analysts who are optimistic about the bond market and hope that the bears will make a profit. Ian Lyngen, head of US interest rate strategy at BMO Capital Markets, wrote in a report this week that given the current pessimism in the market, the Federal Reserve's decision Japan-US debt may actually soar.

Editor/Somer