The US Consumer Price Index (CPI) data is likely to show a 0.3% increase for both the headline and core Month-over-Month (MoM) figures. The Year-over-Year (YoY) headline figure is expected to rise to 2.6% from 2.4%, while the core figure is projected to reach 3.0%, up from 2.8%. The USD stayed mostly steady, except for a slight increase of 0.15% against the JPY. Other currency movements include the GBP down by 0.10%, EUR down by 0.06%, and NZD down by 0.33%. The USD also declined against CHF, CAD, and AUD.

Financial Markets Overview

In the financial markets, earnings results from major banks and investment firms exceeded expectations, leading to a rise in premarket trading. Citigroup reported earnings of $1.96 per share, beating the expected $1.60, while JPMorgan Chase posted earnings of $4.96, surpassing the forecast of $4.47. U.S. indices had mixed results: the NASDAQ rose by 145 points, and the S&P gained 27.69 points, while the Dow saw a slight decline. U.S. yields were mixed, with the 2-year yield up by 2.9 basis points and the 30-year yield down by 1.0 basis points. Crude oil prices fell to $66.89, and Bitcoin dropped to $117,075. This morning’s focus is not just on predicting the CPI number but on preparing for the market’s reaction. Bessent’s sentiment resonates—one data point does not create a trend. Inflation has shown ups and downs, not a steady decline. In the last 12 CPI reports, six came in higher than expected, indicating the uncertainty the market faces. The real market movement often occurs after the initial shock. We believe implied volatility is currently mispriced. The VIX index, which measures expected stock market volatility, typically falls by an average of 5% to 7% in the 24 hours following a CPI release. As uncertainties are resolved, the focus shifts. Therefore, our strategy is to exploit the uncertainty by selling short-dated strangles on the SPX or NDX after the initial price spike, aiming to profit from the anticipated decline in volatility and time decay.

Banking Sector Performance

The strong results from the major banks provide a solid foundation. When prominent banks exceed estimates, it suggests the underlying corporate economy is strong, making a prolonged market panic less likely. This bolsters our confidence in selling downside protection. We see a promising opportunity in selling put credit spreads on the S&P 500. This strategy enables us to collect premium with a high likelihood of success, as robust earnings create a supportive base for the market, even if inflation rises. In the currency markets, the Japanese yen stands out. While the dollar is stable elsewhere, its small gain against the yen is notable. The interest rate difference between the US and Japan, over 500 basis points, supports a higher USD/JPY. For derivative traders, this means using options to build bullish positions with limited risk, like call spreads, to take advantage of the ongoing carry trade appeal likely to last for weeks. Lastly, the Treasury Secretary’s comments on the Fed succession process introduce a long-term variable. This presents a political risk that the market may not fully consider. While the immediate focus is on CPI, this uncertainty suggests that longer-term volatility, especially in the 6-to-9-month range, may be undervalued. We see an opportunity to gradually acquire long-dated VIX calls or far out-of-the-money puts on major indices as an inexpensive hedge against potential political and monetary policy uncertainty later this year. Create your live VT Markets account and start trading now.

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