Traders Are Bracing for Volatility on Fed-CPI Double Blow

Whether it’s another move up or a dive down, traders are bracing for added volatility wrought by Wednesday’s dual macroeconomic catalysts: a report on consumer prices in the morning and the Federal Reserve’s rate decision in the afternoon.

The options market is betting the S&P 500 Index will move 1.25% in either direction that day, based on the cost of at-the-money puts and calls, said Stuart Kaiser, Citigroup Inc.’s head of US equity trading strategy. Should that pricing remain in place by Tuesday’s close, that figure would be the largest implied swing ahead of a Fed decision since March 2023, he added.

“Over the past year, the markets have largely priced CPI and Fed days similarly at 0.75% each on average, so doubling them up makes it a bigger event and raises uncertainty around the event,” said Kaiser, who added that the S&P 500 moved 0.8% on average following each event in the past year. Of the two, Fed days have generally been more profitable events for option buyers than CPI has been, he added.

While markets broadly expect central bankers to hold rates steady, the inflation print as well as Fed Chair Jerome Powell’s press conference will offer more clarity on how much the central bank may cut interest rates this year.

Inflation has been the main focus for investors as the labor market has remained strong. US job growth soared in May, with nonfarm payrolls advancing by 272,000, a Bureau of Labor Statistics report showed Friday. Traders are are largely comfortable with jobs creation above 150,000, Kaiser said. If it were to slide below that, the options market would likely start to shift its attention toward hiring over inflation, he explained.