The range of expectations plays a key role in how the market reacts. When actual outcomes differ from these expectations, it can lead to surprises. Additionally, where these forecasts cluster can provide useful context for market reactions.

Forecast Clusters and Market Surprises

Forecasts can sometimes cluster at one end of the expected range. This means that even outcomes close to the lower end can still be surprising. For the Year-on-Year Consumer Price Index (CPI Y/Y), 47% of forecasts predict a rate of 2.7%, which is the consensus figure, while other estimates range from 2.4% to 2.8%. For the monthly Consumer Price Index (CPI M/M), the consensus is set at 0.3%, representing 65% of forecasts, with other predictions varying between 0.1% and 0.4%. The Core CPI Y/Y consensus stands at 3.0%, accounting for 49% of all forecasts, with predictions ranging from 2.8% to 3.1%. The Core CPI Month-on-Month (M/M) has a consensus of 0.3% from 66% of forecasts, while the rest predict between 0.1% and 0.4%. Core figures are particularly important, as most forecasts cluster around 2.9-3.0% for Y/Y and 0.2-0.3% for M/M. If actual figures differ significantly, we can expect strong market reactions due to little expectation for major fluctuations. Given this forecast distribution, traders in derivatives have a clear path ahead. We are not just facing a simple event; instead, we anticipate considerable volatility as the market is tightly grouped around a narrow consensus. The clustering of these forecasts indicates high confidence, which ironically makes deviations from the consensus more painful, rather than confirmations.

Positioning and Strategy for Market Volatility

Here’s how we plan to position ourselves. The analysis points to the importance of the Core M/M figure. With 93% of economists predicting a rate between 0.2% and 0.3%, any result outside this range could trigger significant movements. This is heightened by the context of recent data. The May jobs report showed a surprising increase of 272,000 jobs, far exceeding expectations and delaying anticipated rate cuts. This adds pressure to the upcoming inflation report. If inflation also exceeds expectations, it could reshape views on a resilient, yet possibly accelerating economy, leading to a sharp adjustment in the rates market. We know that Powell is focused on this data. As a result, buying volatility seems very appealing. The VIX index has been trading in the low 12-14 range, making options relatively affordable. We see value in purchasing near-term straddles or strangles on the S&P 500 or Nasdaq 100 ETFs ahead of the data release. The market is displaying complacency that does not reflect the potential for unexpected results. A Core M/M print of 0.4%, which only 4% of forecasters expect, would not just be a surprise; it would strongly challenge the prevailing disinflation narrative, likely causing risk assets to drop sharply and bond yields to rise. This represents a tail risk that options are currently not pricing correctly. On the flip side, the risks are unbalanced. A Core M/M print of 0.2%, while falling short of expectations, is predicted by over a quarter of economists. This would be a positive surprise for the market, likely reinstating interest in a September rate cut, which the CME FedWatch Tool currently assesses as a 50/50 chance. However, this movement would probably be less drastic than a surprise on the upside, as it aligns with the desired disinflation trend. The real value lies in the extremes of the distribution. We can look to past events for guidance. In September 2022, a Core CPI result just 0.1% higher than consensus led to a more than 4% drop in the S&P 500 in just one day. The current market feels much more optimistic, making it similarly susceptible to a shock. Therefore, our strategy is not about betting on a certain direction but rather on breaking away from this tightly held consensus. We aim to either profit from a spike in volatility following the data release or step into a directional trade once a new trend forms. The market has outlined a clear path; the biggest risk is assuming the consensus is always right. Create your live VT Markets account and start trading now.

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