Investors are preparing for a significant one-day stock market volatility on the day of the Federal Reserve's decision and CPI release, which may be the largest since the Silicon Valley Bank crisis in March 2023.
The day when the Fed's interest rate decision is released this Wednesday coincides with the release of CPI inflation.
What will the Fed decide without the May inflation data? Will CPI inflation trend be completely opposite to the Fed's expected statement? Given the outcome of various stimulus policies, the market generally believes that US risk assets will experience huge fluctuations on Wednesday.
According to analysis by JPMorgan's trading desk of straddles expiring on the day, the market is betting that the S&P 500 index will fluctuate between 1.3% and 1.4% before this Friday.
The bank pointed out in a report that:
There is a possibility of discrepancy between Powell's press conference and the CPI results released on the day of the consumer price index (CPI) and Fed interest rate decision.
At the same time, Citibank also pointed out that investors are preparing for the largest single-day stock market volatility since the Silicon Valley bank crisis in March 2023 on the day of the Fed decision and CPI data release.
JPMorgan believes that if the month-on-month increase in core CPI exceeds 0.4%, all risk assets may face selling, leading to a 1.5-2.5% drop in the S&P 500 index. However, the bank believes that this possibility is only 5%.
If the month-on-month increase in core CPI is between 0.3% and 0.35%, the increase or decrease of the S&P 500 index is within 0.75%. The key is whether housing costs continue to decline and whether car and medical prices rise. If the month-on-month increase in core CPI falls to between 0.2% and 0.25%, the market may expect the Fed to cut interest rates in September. Some traders may even bet on the possibility of a rate cut in July. This is mainly because the European Central Bank has already cut interest rates last week, and the Fed may follow suit.
Once the month-on-month increase in core CPI drops below 0.2%, it will be considered a major bullish factor, which may cause the S&P 500 index to rise by 1.75% to 2.5%.
Currently, the market expects a 0.3% month-on-month increase in core CPI in May.
However, media analysis points out that investors may be overestimating the expectations of large fluctuations. Recently, overall market volatility has remained at a low level. The Chicago Options Exchange VIX index, which measures the implied volatility of the S&P 500, is hovering around 13, close to a one-year low, far below the critical value of 20 that represents a surge in volatility.
Editor/Somer