Key Takeaways with Craig
US Equity prices rose modestly after today’s CPI release showed year over year inflation at the slowest level since March, 2021. Implied volatility in CME Group’s Equity index options was little changed today and the options that expire tomorrow, after the FOMC decision on its Fed Funds target, remain elevated. Incidentally, after today’s CPI number, CME’s FedWatch tool is assigning a 94% chance of no change to the Fed Funds target tomorrow, up from 79% yesterday. The tool continues to suggest that the market is pricing in a rate hike at the July meeting.
Despite the lower CPI number and increased probability of no change at tomorrow’s FOMC meeting, the Micro 2-Year Treasury Yield future was up by 8.5 basis points today and the Micro 10-Year was up by about 6.5. The Micro 2-Year yield is still about 40 basis points lower than the highs we saw in the beginning of March but is up by about 95 basis points in the last, approximately, 5 weeks.
The implied volatility curves in CME’s FX options versus the Equity Index options serves as a nice example of how events like an FOMC meeting can impact the implied volatility at which different options trade. The upper QuikStrike image below shows the Euro FX option implied volatility curve and the lower image depicts the E-mini S&P 500 options curve. As you can see, the Euro FX options expire at 10:00 AM Eastern (before the FOMC announcement anticipated at 2:00 PM), while the E-mini S&P 500 expire at 4:00 PM Eastern (after the anticipated FOMC announcement). In the Euro FX, the options that expire tomorrow before the FOMC announcement are trading at an implied volatility far below those that expire on Thursday after the rate decision; in the E-mini S&P 500, the options expire after the announcement tomorrow afternoon and are trading well above those that expire on Thursday. Again, we thought this was a nice illustration of the uncertainty that gets priced into the options market during events like an FOMC decision.
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