CPI Release Set to Spark Major S&P 500 Move

The Big Swing: Options Signal Heightened Expectations

Traders, take note: today’s CPI print is poised to be a market mover. Options are pricing in a potential 1%+ swing in the S&P 500 on the back of this data, signaling heightened expectations for volatility.

Calm Before the Storm? Recent Market Resilience

Recent market performance has been resilient, with the S&P up 3% from last week’s lows and the VIX settling around 20 after its recent spike to a four-year high. However, historical patterns suggest we may be in for an extended period of market choppiness.

VIX Alert: Buckle Up for a Bumpy Ride

Key context: when the VIX surpasses 35, it typically takes an average of 170 sessions to revert to its long-term median of 17.6. JJ Kinahan, CEO of IG North America, projects this could lead to market instability for six to nine months. Clearly, we’re not looking at a quick return to calm waters.”

The Main Event: July CPI in the Spotlight

The July CPI number is now the focal point. Consensus expectations are for a 0.2% increase in both headline and core figures. This would maintain annual inflation at 3%, with core potentially easing to 3.2%. However, estimates for core CPI range from 0.1% to 0.3%, leaving room for surprises.

Fed Watch: Rate Cut Roulette

The significance of this print lies in its implications for Fed policy. September rate cut probabilities are high, but the magnitude remains uncertain. CME data shows a near-even split between expectations for a 25bp and 50bp cut. Looking further out, there’s a 77% probability priced in for a full percentage point reduction by year-end.

The Inflation Wildcard: Sticky Prices Could Spoil the Party

Here’s the rub: if inflation proves stickier than anticipated, it could derail the rate cut narrative. Such a scenario would likely trigger a significant market repricing.

Correction Watch: Are We Out of the Woods?

It’s worth noting that we narrowly avoided correction territory last week. Historically, when the S&P 500 approaches a 10% drawdown this closely, it tends to complete the correction within 26 trading sessions on average.

The Bottom Line: Brace for Impact

In summary: today’s CPI release has the potential to either validate or challenge the current market rally. A print that aligns with the Fed’s disinflation narrative could fuel further gains. Conversely, a hotter-than-expected number might reignite last week’s selling pressure. Stay alert and manage your risk accordingly. The next few trading sessions could be decisive.