Recently, the market has remained stable as traders wait for the US CPI data. The NFP report brought clarity, suggesting two potential rate cuts as the likely scenario.

Impact Of Upcoming CPI Data

The upcoming CPI data could change market expectations, but only if the numbers differ significantly from what people expect. If the data matches expectations, it probably won’t change prices much. By the end of the year, rate cuts are expected: – Fed: 48 basis points, with a 95% chance of no change at the next meeting. – ECB: 23 basis points, with a 97% chance of no change. – BoE: 58 basis points, with an 89% likelihood of a rate cut. – BoC: 21 basis points, with an 87% chance of no change. – RBA: 56 basis points, with an 80% likelihood of a rate cut. – RBNZ: 33 basis points, with a 72% chance of a rate cut. – SNB: 9 basis points, with an 85% chance of no change. For rate hikes, the BoJ expects a 14 basis point increase, with a 99% probability of no change at their next meeting. The current calm in the market is an opportunity. This calm isn’t stability—it’s the buildup before a sudden movement. While the NFP data brought expectations back in line, the upcoming US CPI report is the true test. The forecast is for headline CPI to cool to a 3.4% annual rate and core inflation to drop to 3.6%. Any deviation from these numbers will likely cause a big reaction. If the numbers are as expected, it just postpones the next move, but a surprise will quickly change positions.

Mispricing In Volatility

We see the biggest mispricing right now in volatility. The VIX index, currently around 13, doesn’t seem to reflect the risk of a market-moving CPI surprise. This reminds us of mid-2022, when low VIX levels exploded after higher-than-expected inflation data caused a swift drop in equities. While Fed officials like Williams speak cautiously, we notice the strong hawkish stance from voting members like Kashkari, who highlighted that the central bank isn’t ready to declare victory over inflation. This tension within the Fed isn’t shown in the current low volatility. In response, we plan to buy volatility, focusing on short-dated straddles and strangles on major indices ahead of the data release. This strategy allows us to profit from the size of the move rather than the direction, which is where we see market complacency. Looking at global markets, the expectation of 58 basis points in cuts from Bailey seems overly optimistic. Recent UK wage growth remains stubbornly high at 6.0%, an important metric for the Bank of England. This persistent figure indicates that their path to cutting rates is more complex than the market assumes, making derivatives that bet against such aggressive cuts attractive. Similarly, the 23 basis points priced for the ECB may not fully account for their caution. With Eurozone core inflation remaining sticky at 2.7%, well above their target, policymakers have little reason to hurry. The real divergence is with the Bank of Japan. Though only 14 basis points of hikes are anticipated, the yen continues to weaken, with the dollar recently exceeding ¥156. This ongoing weakness, along with Japan’s core inflation reaching 2.2% in March, raises the chance of a significant policy shift sooner than expected. The risk-reward for trades betting on a more hawkish surprise from the BoJ is becoming increasingly attractive. Create your live VT Markets account and start trading now.

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