Key Takeaways with Craig

US Equity prices rallied out of the gate this morning and remained higher through afternoon trading, ahead of tomorrow’s FOMC decision on its Fed Funds target rate.  Implied volatility in CME’s Equity Index options with 30 days left until expiration came down, but vol in the options that expire tomorrow rose again, reflecting the uncertainty and market-moving potential of tomorrow’s announcement. 

US Treasury yields traded sharply higher, particularly at the short end of the curve where the Micro 2-Year Yield future was up by over 23 basis points (“bps”).  The Micro 10-Year was up by about 14 bps, which increased the inversion between the two to a bit over 50 bps.  The CVOL level on yield in the Treasury options came down but still remains elevated and, while the Calls have gained a bit versus the Puts over the last several days, the CVOL skew remains decidedly toward the Puts. 

Finally, after hitting near 12-month high levels on Monday, the price of Gold Futures fell by over 2% today.  Gold has been particularly active lately which has been reflected in its CVOL levels.  As the price of Gold spiked last Monday with the volatility we saw in the Equity and Interest Rates markets, implied volatility in the options jumped as well. In fact, the CVOL level moved from about 14.6 to 19.5 from Friday March 10th to Monday, March 13th;  a relative increase of about 33%.  While CVOL has come off its recent highs, it remains elevated at about 18.6. 

Finally, as we head into tomorrow’s FOMC decision announcement, we found it interesting to look at the probabilities that CME’s FedWatch tool has assigned to different outcomes over the last several months.  The graph below was created using data downloaded from CME’s FedWatch tool on its website and includes the % probability of the target Fed Fund rate being 450-475 (which is what it currently is), 475-500 (a hike of 25 basis points) and 500-525 (a hike of 50 basis points) after tomorrow’s meeting conclusion.  As you can see, none of these three outcomes registered as a possibility until around September of last year.  Since then, at least according to Fed Funds futures prices (the measure by which the FedWatch tool seeks to assign these probabilities), the probabilities have varied widely as economic data and events have come into play.  In fact, as seen by the gray line in the graph, the market was overwhelmingly pricing in a 50 basis point hike as recently as the first week of March, but is now pricing in a 25 bps hike with a small probability of “no change”. 

But, as they say in sports, ‘that’s why they play the game’, so we won’t know for sure until about 1:00 pm Chicago time tomorrow and we’ll be back to report on the market impact tomorrow evening.    

Today's Future Price Action

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