Anticipation of Fed Meeting and CPI Release Stirs Market Volatility

Anticipation of Fed Meeting and CPI Release Stirs Market Volatility


This Wednesday, the day the Federal Reserve announces its interest rate decision, coincides with the release of the CPI inflation data. Without access to the May inflation data, how will the Fed make its decision? Could the CPI inflation trend be completely at odds with the Fed's anticipated statement? Considering various stimulating factors, the market widely believes that significant volatility will hit US risk assets on Wednesday.


Analyst Predictions and Potential Market Reactions

According to an analysis of straddle options expiring that day by JP Morgan's trading desk, the market is currently betting that the S&P 500 index will fluctuate by 1.3% to 1.4% by this Friday.


In a report, JP Morgan pointed out:

"There is a possibility of a contrast between the results of the Consumer Price Index (CPI) released that day and the Fed's rate decision, with a potential divergence between Powell's press conference and the CPI results."


Similarly, Citibank noted that investors are preparing for significant market volatility on the day of the Fed's decision and CPI release, which could lead to the largest single-day stock market movement since the Silicon Valley Bank crisis in March 2023.


JP Morgan predicts that if the core CPI month-over-month increase exceeds 0.4%, all risk assets may face selling pressure, leading the S&P 500 index to drop by 1.5% to 2.5%. However, the bank believes this possibility is only 5%.


If the core CPI month-over-month increase is between 0.3% and 0.35%, the S&P 500 index's fluctuation will be within 0.75%, depending on whether housing costs continue to decline and whether car and medical prices rise.


If the core CPI month-over-month increase falls to between 0.2% and 0.25%, the market might anticipate the Fed will cut rates in September, with some traders even betting on a possible rate cut in July. This expectation considers that the European Central Bank has already cut rates last week, and the Fed might follow suit.


If the core CPI month-over-month increase falls below 0.2%, it will be seen as a significant positive, possibly driving the S&P 500 index up by 1.75% to 2.5%.


Currently, the market expects the US core CPI to increase by 0.3% month-over-month in May.


However, media analysis suggests that investors might be overestimating the potential for significant volatility. Recently, overall market volatility has remained at a low level, with the VIX index—measuring the implied volatility of the S&P 500—hovering around 13, close to a one-year low and well below the threshold of 20, which indicates rising volatility.