U.S. CPI "joins forces" with the Federal Reserve, making Wednesday's market very exciting

This Wednesday, the global markets will face two major economic events: the release of the US Consumer Price Index (CPI) report and the Federal Reserve interest rate decision.

Stuart Kaiser, Head of Equity Trading Strategy for Citigroup in the United States, stated that the options market anticipates that these two events may trigger a volatility of up to 1.25% in the S&P 500 index on the day, marking the largest expected volatility before a Federal Reserve decision since March 2023.

Kaiser explained that over the past year, the expected volatility in the market on CPI release days and Federal Reserve decision days has typically been 0.75%. Therefore, the doubling of this predicted volatility reflects the increased importance of these two events, adding to market uncertainty. He also added that following these types of events, the average volatility of the S&P 500 index is 0.8%, with the volatility on Federal Reserve decision days usually more favorable for option buyers.

While the market generally expects the Federal Reserve to keep interest rates unchanged, inflation data and Federal Reserve Chairman Jerome Powell's press conference will provide more clues to the potential rate cut magnitude for this year.

Regarding inflation, with a continued strong performance in the job market, inflation has been a focal point of investor attention. A report released by the US Bureau of Labor Statistics last Friday showed that non-farm payrolls in the US increased by 272,000 in May, far exceeding expectations.

Kaiser stated that the market is satisfied with the addition of over 150,000 new jobs. He added that if the number of new jobs decreases, the options market may start to focus more on hiring rather than inflation.

Additionally, there is an inconsistent trend in options activity related to the Secured Overnight Financing Rate (SOFR). Increased demand for hedging trades that may take a dovish stance at the policy meeting has opened the door for potential rate cuts in July or September.

At the same time, investors are also increasing protective positions for hawks, targeting the end of next year and beyond. These positions will benefit if the economic forecast summary for June shows a hawkish shift in longer-term Federal Reserve forecasts.

Data shows that these investments are mainly concentrated in put butterfly options expiring in December 2025 and March 2026, with some structures having contract volumes exceeding 200,000.

Tanvir Sandhu, Chief Global Derivatives Strategist at Bloomberg Intelligence, stated:

"Bond markets experience increased volatility around important data releases, while stock markets are more influenced by long-term AI trends...

During key data releases, interest rate markets may fluctuate within a certain range, thereby reducing market volatility."

In the foreign exchange market, Bloomberg's US Dollar Index saw its highest weekly volatility of the year, with the risk reversal indicator showing a premium of over 0.4% for bullish USD options, the highest in a month, partly due to volatility in the Mexican Peso.

Looking ahead, the market's view on the US dollar remains relatively pessimistic, with expectations of future rate cuts by the Federal Reserve leading to increased demand for bullish options on safe-haven currencies such as the Swiss Franc and Japanese Yen