This Wednesday, the global market will see two major economic events: the US consumer price index (CPI) report and the Federal Reserve interest rate decision.
Stuart Kaiser, Citigroup's head of US stock trading strategies, said that the options market expects the two events to cause a 1.25% daily volatility in the S&P 500 index, the largest expected volatility before the Federal Reserve decision since March 2023.
Kaiser explained that in the past year, the expected volatility of the market for CPI release days and Federal Reserve decision days was usually 0.75%, so the predicted volatility doubled this time, reflecting the increased importance and increased market uncertainty of these two events. He also added that the average volatility of the S&P 500 index was 0.8% after these two events, of which the volatility of the Federal Reserve decision day was usually more favorable for option buyers.
Although the market generally expects the Federal Reserve to maintain its interest rate, inflation data and Fed Chairman Jerome Powell's press conference will provide more clues about the potential rate cut this year.
Regarding inflation, it has been a focus of investor attention against the backdrop of a sustained strong performance in the job market. The report released by the US Bureau of Labor Statistics last Friday showed that non-farm payroll employment in the United States increased by 272,000 in May, far exceeding expectations.
Kaiser said that the market is satisfied with the addition of more than 150,000 new jobs. He added that if the number of new jobs decreases, the options market may focus more on hiring rather than inflation.
In addition, option activity related to overnight financing rate (SOFR) collateral has shown inconsistent trends. The increase in hedging demand for decision-making meetings that may adopt dovish positions opened the door to rate cuts in July or September policy announcements.
At the same time, investors are also increasing protective positions against hawks, targeting the end of next year. If the June Economic Forecast Summary shows a hawkish shift in longer-term Federal Reserve forecasts, these positions will benefit.
Data shows that these investments are mainly concentrated in put butterfly options that expire in December 2025 and March 2026, and some of these structures have a contract volume of more than 200,000.
Tanvir Sandhu, chief global derivatives strategist at Bloomberg Intelligence, said:
"The bond market's volatility intensifies before and after important data releases, while the stock market is more influenced by AI's long-term trends...
During the release of key data, interest rate markets may fluctuate within a certain range, thereby reducing market volatility."
In the forex market, Bloomberg's US dollar index has the highest weekly volatility this year, and the risk reversal index shows a premium of more than 0.4% for USD call options, the highest in a month, partially due to the volatility of the Mexican peso.
In the long run, the market's view of the US dollar is still relatively pessimistic, and it is expected that the Federal Reserve will cut interest rates in the future, increasing the demand for call options for safe-haven currencies such as the Swiss franc and the yen.
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