Wall Street bets on a volatile market on the night of the CPI! Traders prepare nervously
Citigroup stated that the S&P 500 index may fluctuate by 1% in either direction on the day the CPI data is released. Some large banks have adjusted their interest rate cut expectations, with Bank of America even stating that they now expect the Federal Reserve will not cut rates this year
Under the dual influence of the upcoming CPI data and the earnings season, market participants are closely watching for potential volatility in the coming days.
Recently, rising bond yields and strong employment data have been observed. Stuart Kaiser, head of U.S. equity trading strategy at Citigroup, stated that the S&P 500 could fluctuate by 1% in either direction on the day the CPI data is released. This is the largest implied volatility before the CPI data release since March 2023.
Concerns about persistent inflation and the Federal Reserve's interest rate cut path have pushed the VIX index up to 20. Data from derivatives analytics firm Asym 500 shows that both expected and actual volatility measures are above average starting from 2025.
Brent Kochuba, founder of options platform SpotGamma, pointed out that if the CPI data comes in below expectations, it could drive the S&P 500 to quickly rebound above 5900 points. However, if the CPI data exceeds expectations, it could lead to a sharp decline in the S&P 500 and a significant rise in the VIX index.
The CPI report will provide traders with more clues about the direction of the Federal Reserve's interest rate policy. Some major banks have already adjusted their rate cut expectations, with Bank of America even stating that they now expect the Federal Reserve will not cut rates this year.
Last week's employment data showed that the U.S. economy added the most jobs since March in December, supporting the case for pausing rate cuts.
Analysts currently expect the core CPI in December to rise by 0.2% month-over-month, down from 0.3% in November, and to increase by 3.3% year-over-year, above the Federal Reserve's 2% target, but in line with the readings from the previous three months.
Meanwhile, the fourth-quarter earnings season will officially begin on Wednesday. Led by financial giants such as JP Morgan, Citigroup, and BlackRock, this could further exacerbate market volatility.
Chris Murphy, co-head of derivatives strategy at Susquehanna International Group, stated:
"Now, the volatility of these macro events has intensified."