Stocks & Bonds Sink Despite ‘Improvement’ In Powell’s Preferred Inflation Print : by Tyler Durden

Stocks & Bonds Sink Despite ‘Improvement’ In Powell’s Preferred Inflation Print

Tyler Durden
Tue, 02/14/2023 – 09:16

​ Stocks & Bonds Sink Despite ‘Improvement’ In Powell’s Preferred Inflation Print

While the headline and core CPI printed in line with expectations, Core services CPI, excluding shelter – a measure Fed Chairman Powell has highlighted – has cooled on a year-over-year basis. Powell has also flagged housing services as a segment of the economy with disinflation in the pipeline, as long as rents keep coming down. Housing activity has weakened with the jump in mortgage rates. S&P 500 futures briefly turned red before recovering and continuing to climb

Source: Bloomberg

Theoretically, that should have eased concerns about a more hawkish tilt, helping risk assets… but it didn’t…

Stocks whipped around but are trending down into the cash open for now…

With rate-trajectory expectations surging back hawkishly, with the terminal rate now nearing 5.25% and less than one rate-cut priced-in for H2 2023…

Specifically, the odds of 25bps hikes in May and June have jumped to 82% and 59% respectively…

Treasury yields are leaking higher led by the short-end…

As BMO notes, the kneejerk rally was a result of the unrounded core figure, and we’ve seen 10s selloff with 2s/10s down to -86bps…

“From here, there is today’s Fedspeak with which to contend, and we don’t think there is anything contained within this read to call into question the FOMC’s hawkish commitment.”

The dollar is rising now but has been whipping around since the print…

Oil prices are sinking on the potential for a more hawkish Fed…

Finally, we warn that the cash open could change everything as SpotGamma notes today’s 0DTE ATM straddle (ref 4145) was trading $67 ahead of the print with an IV of 36% which is a reduction vs previous CPI-day IV’s.

This implied traders were pricing in a ~1.5% move for today. Overall we think there is less chance of a +1.5% upside move vs a +1.5% downside  move.

This is because hedging resistance should build to the upside due to positive gamma, while under 4100 there is likely more negative  gamma.  With CPI printing in line, SpotGamma expects a reduction in implied volatility and markets testing the 4200 Call Wall as cash opens.

With that in mind, if markets push higher today into tomorrow, that shifts the balance of Fridays OPEX to a call weighted expiration, which may generate market weakness/consolidation into early next week.

4100 remains our gamma flip level, which is where our market view shifts from bullish (above) to bearish (below). Therefore a break of 4100 should invoke dealer shorting and a test of 4000 into Friday.

Tyler Durden
Tue, 02/14/2023 – 09:16