Traders Brace for 1.25% S&P 500 Swing on Fed-CPI Double Blow

Key Takeaway

• Traders expect significant volatility with the S&P 500 potentially moving 1.25% on Fed and CPI data, the largest implied swing since March 2023.
• Markets anticipate steady rates but look to inflation data and Powell's comments for clues on future rate cuts.
• Options activity shows mixed hedging strategies, with increased demand for both dovish and hawkish protections amid ongoing market uncertainty.

Anticipated Volatility Ahead

Traders are bracing for heightened volatility in the U.S. financial markets this week, driven by two major macroeconomic events on Wednesday: the release of the Consumer Price Index (CPI) report in the morning and the Federal Reserve's rate decision in the afternoon. According to Stuart Kaiser, Citigroup Inc.'s head of U.S. equity trading strategy, the options market is pricing in a 1.25% move in either direction for the S&P 500 Index based on the cost of at-the-money puts and calls. This would mark the largest implied swing ahead of a Fed decision since March 2023. "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," Kaiser noted. Historically, the S&P 500 has moved an average of 0.8% following each event in the past year, with Fed days generally being more profitable for option buyers than CPI days.

Market Expectations and Fed's Role

While the market broadly expects the Federal Reserve to hold rates steady, the upcoming inflation print and Fed Chair Jerome Powell's press conference will provide more clarity on potential interest rate cuts this year. Inflation remains a key focus for investors, especially as the labor market continues to show strength. The Bureau of Labor Statistics reported a significant increase in U.S. job growth in May, with nonfarm payrolls advancing by 272,000. Traders are comfortable with job creation above 150,000, but any slide below that could shift market attention from inflation to hiring concerns, according to Kaiser.

Recent options activity linked to the Secured Overnight Financing Rate has shown mixed signals. There has been increased demand for hedges targeting a dovish Fed meeting, potentially opening the door for a rate cut at the July or September policy announcements. Fed swaps are pricing in a full 25 basis points of easing by the November decision, with significant trading activity in large September 2025 call flies. Conversely, investors have also been loading up on hawkish protection, targeting the end of next year and beyond, with positions centered around December 2025 and March 2026 put-flies, some of which now exceed 200,000 contracts.

Dollar and Global Market Dynamics

On the foreign exchange front, one-week volatility on the Bloomberg Dollar Index is at a high for the year, with risk reversals showing a premium for greenback calls, the highest in a month. This is partly fueled by turmoil in the Mexican peso. Longer-term sentiment remains relatively bearish on the U.S. dollar, anticipating future Fed cuts. Demand has increased for call options on yield-sensitive haven currencies like the Swiss franc and yen. "The bond market continues to remain volatile around data releases while for equity the secular theme of AI dominates," said Tanvir Sandhu, Bloomberg Intelligence’s chief global derivatives strategist. "Periods between key data releases can see the rates market range bound and therefore dampen volatility."

Global markets are also facing headwinds. The euro is under pressure following French President Emmanuel Macron’s call for a snap parliamentary vote, adding to political uncertainty. Japanese Government Bonds (JGBs) are expected to see reduced purchases by the Bank of Japan, with Governor Ueda potentially preparing the market for a July hike. China's equities are seeking new catalysts as initial optimism from recent policy announcements wanes, while India's stocks may gain traction following the resolution of election-related uncertainties.

Street Views

• Stuart Kaiser, Citigroup Inc. (Neutral on the S&P 500 Index):

  "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."

• Tanvir Sandhu, Bloomberg Intelligence (Neutral on bond market volatility):

  "The bond market continues to remain volatile around data releases while for equity the secular theme of AI dominates... Periods between key data releases can see the rates market range bound and therefore dampen volatility."