Fed Chair Jerome Powell will speak tomorrow, even though the Federal Reserve is currently in a quiet period before the FOMC rate decision on July 30. He will deliver opening remarks at the Integrated Review of the Capital Framework for Large Banks Conference in Washington, DC. Attendees should not expect comments on the economy, policy, or any sensitive issues, as the quiet period restricts such discussions. His remarks are likely to be general and follow usual protocols.

Richmond Fed Manufacturing Index

The Richmond Fed manufacturing index will be released at 10 AM, with expectations of a reading of -3, compared to the previous -7. In contrast, the Philly Fed manufacturing index surprised everyone last week with a result of 15.9, significantly better than the estimated -1.2. We think traders should not focus too much on Powell’s upcoming speech about the capital framework for banks. This talk is mainly a technicality and will probably not provide any hints about future monetary policy. Getting caught up in news about Powell’s speech could distract from the important data points this week. Mixed signals from manufacturing data make this a good time for derivatives trading. While the Philly Fed number was unexpectedly strong, the latest S&P Global Flash US Manufacturing PMI for July dropped to 49.0, indicating a contraction. If the Richmond index shows improvement, it will only add to the confusion, making bets on market direction risky. This inconsistency isn’t unique. The broader ISM Manufacturing PMI has been below 50 for eight months, with a reading of 46.0 in June. This ongoing weakness suggests the economy isn’t on a clear recovery path, making it tougher for the Federal Reserve to decide its next steps. We think the market might be underestimating the risk of a surprise in the Fed’s statements.

Market Expectations and Volatility

The market is nearly certain of a 25-basis-point rate hike at the July meeting, according to the CME FedWatch tool. This makes the actual decision feel less significant. The real focus will be on the statement and press conference that follow, which will have to deal with mixed economic data. We anticipate increased volatility as the market processes the forward-looking statements. Given this situation, we see the current levels of volatility as attractively low. The CBOE Volatility Index (VIX) has been between 13-15, close to its 52-week low and historically low before an important policy decision. This suggests that options are relatively affordable, giving us a chance to profit from a larger-than-expected price movement. Therefore, we plan to buy volatility before the FOMC announcement. We are considering purchasing near-term straddles or strangles on indices like SPX or QQQ. This strategy allows us to benefit from significant price moves in either direction, which could arise from the mixed data and ongoing policy uncertainty. Historically, times of uncertain economic data leading up to a key central bank meeting often result in a sharp breakout once the policy direction is clear. We aim to take advantage of this expected release of built-up market energy. The key is not to guess the direction but to acknowledge that the market will move decisively once new information is available. Create your live VT Markets account and start trading now.

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