Inflation Risks Remain Elevated
Schmid said the growth trajectory remains strong, helped by fiscal policy. He said the labour market is in balance. He said services inflation is strong and running faster than would be consistent with a return to 2% inflation. He said he is open to the possibility that AI could drive non-inflationary growth, but said the economy is not there yet. We recall hearing these exact warnings about hot inflation and strong demand throughout 2025. Now, with the latest Consumer Price Index report for February 2026 showing core inflation holding stubbornly at 3.5%, it is clear that the market’s earlier optimism was misplaced. The path to 2% inflation is proving much slower than anticipated. This reality should prompt us to look at interest rate derivatives that bet on fewer, or later, rate cuts. The Fed Funds futures market has already repriced sharply in the last month, moving from predicting three cuts in 2026 to now barely pricing in one by year-end. We believe there is value in selling December 2026 SOFR (Secured Overnight Financing Rate) futures, anticipating the Federal Reserve will be forced to maintain a restrictive policy stance longer than many expect.Positioning For Higher Volatility
The strong services inflation that was a concern last year continues to be the primary issue, as evidenced by recent wage growth data still above 4%. This ongoing policy uncertainty suggests a period of higher market volatility ahead. We see the VIX, which has been hovering around 17, as undervalued and would consider buying call options on it as a hedge against a potential market correction. The combination of a strong growth trajectory and persistent inflation creates a headwind for equities. While AI was hoped to be a source of non-inflationary growth, we are not yet seeing that materialize in broad productivity statistics. We are therefore considering protective put options on major indices like the S&P 500, especially heading into the next Fed meeting. Create your live VT Markets account and start trading now.
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