The market holds its breath! CPI and bank earnings season are coming on Wednesday, is turmoil in the US stock market imminent?
The market is focused on the upcoming U.S. Consumer Price Index (CPI) report, which is expected to trigger market volatility. The December CPI report will be released on Wednesday, with the core CPI expected to rise 0.2% month-on-month and 3.3% year-on-year. Strong employment data has led to a decrease in interest rate cut expectations, pushing U.S. Treasury yields higher. Analysts point out that the CPI data will influence the Federal Reserve's interest rate cut path, potentially leading to fluctuations in the S&P 500. Investor sensitivity to the inflation report has increased, and the VIX index shows market concerns
According to the Zhitong Finance APP, options traders are on high alert for the U.S. Consumer Price Index (CPI) report to be released on Wednesday, which could trigger a new round of market turmoil. The U.S. December CPI report is expected to be published at 21:30 Beijing time on Wednesday, with the market anticipating a 0.2% month-on-month increase in core CPI excluding food and energy costs, down from 0.3% in November. The market also expects a year-on-year increase in core CPI of 3.3%, above the Federal Reserve's 2% target, but in line with the data from the previous three months.
With strong employment data severely impacting interest rate cut expectations, U.S. Treasury yields have surged, making the CPI report a focal point for the market. Stuart Kaiser, head of U.S. equity trading strategy at Citigroup, stated that based on the costs of put and call options, the S&P 500 index is expected to fluctuate by 1% up or down on January 15. This is the largest implied volatility before the CPI data release since the turmoil in U.S. regional banks in March 2023.
Traders believe that the CPI data will provide clear information on the Federal Reserve's interest rate cut path for this year. Prior to this, several major banks reduced their bets on rate cuts following the strong employment report, with Bank of America even predicting no rate cuts. This shift in tone has driven the U.S. stock market lower at the beginning of the year.
Brent Kochuba, founder of the options platform SpotGamma, stated, "Given the rising volatility, a cooling CPI data could quickly push the S&P 500 index back above 5900 points." "If the CPI data is hot, we may see a faster decline in the S&P 500 index, which would correspond with a significant jump in the volatility index (VIX)."
The S&P 500 index has erased its gains for the year, with concerns over sticky inflation pushing the VIX index up to 20 points, indicating traders' worries. Data from derivatives analysis firm Asym 500 shows that both expected volatility and actual volatility indicators are above average starting from 2025.
The VIX index is above the average level of the past year.
The reaction of the options market on the eve of the CPI data release indicates that investors have become more sensitive to inflation reports again. Last year, after experiencing the most aggressive interest rate hike cycle in decades, attention shifted to the employment target in the Federal Reserve's dual mandate as inflation slowed, leading to a relatively mild response from the U.S. stock market to consumer price signals.
It is noteworthy that the fourth-quarter earnings season will officially kick off on Wednesday, with JPMorgan, Citigroup, and BlackRock set to release their earnings reports, which could also lead to significant fluctuations in the U.S. stock market. According to a report from Bank of America, options traders expect an average fluctuation of 4.7% up or down in individual stocks within the S&P 500 index after earnings announcements, marking the largest fluctuation on earnings day in historyChris Murphy, Co-Head of Derivatives Strategy at Susquehanna International Group, stated: "Currently, these macro events are exacerbating volatility."