What a Week Ahead: CPI, FOMC, ECB, Quarterly Expiration

There are some Mondays when we wonder what, if any, catalysts we might have for the week ahead.  This isn’t one of those weeks.

On Tuesday we have the CPI report for November.  On Wednesday we have an FOMC meeting.  On Thursday the ECB follows the Fed with their own rates announcement.  And on Friday we have a quarterly expiration of futures and options.  Any of those could get markets moving.  We get all of them in a week when many investors are trying to think ahead to holidays and ending a tricky year.

Despite last week’s unpleasantly surprising PPI report – stocks rallied anyway – expectations for CPI are for an improvement.  The consensus is for a month-over-month rise of 0.3% in both the headline and core readings.  The former would be a decline of 0.1% from last month, while the latter would be unchanged.  Both would produce reductions in the widely reported year-over-year numbers because they would be replacing higher numbers from a year ago.

Of course, inflation matters most within the context of how it could influence Fed policy.  In this case, it won’t take us long to see whether Tuesday’s CPI report has any influence on Wednesday’s FOMC meeting.  For several weeks, Fed Funds futures have been implying a 50-basis point hike this week.  By this point, it has been well telegraphed by Chair Powell and other Fed speakers.  Yet the course of policy over the coming meetings is far less certain.  Futures are currently pricing in a greater likelihood for a 50 bp hike than a 25 bp hike at the February 1^st meeting and rates peaking just below 5% in either March or May.  We will get a fresh dot plot this week and we can learn whether the market’s views are in sync with those of the FOMC.  The futures’ markets peak rate expectations have been slipping modestly but steadily from about 5.1% to 4.99% and there are two 25bp cuts priced in by the end of 2023.  Let’s find out if those opinions – particularly those of a late-year pivot – are shared by the FOMC.  (Spoiler alert: Bullard and Williams recently told us they’re not.)

The real action from an FOMC meeting of course comes during and after Powell’s press conference.  It is impossible what he might say, and sometimes the tone of his comments is as important as the comments themselves.   We saw markets respond positively to his positive tone two weeks ago, even though his actual comments weren’t all that novel.  The market usually takes a day or two to digest the press conference, which of course leads us into… quarterly expiration on Friday.

“Triple-witching” expirations can often lead to volatility as traders roll their expiring positions or attempt to hedge contracts that are expiring that morning or afternoon.  There are more items to hedge or roll on major expirations, so there is a greater possibility for an expiration-linked move.  That possibility can be especially heightened when liquidity is stretched, or traders simply are less eager to take on new positions.  Late December is a time when many traders want to shrink their exposures, not add to them.

Two other wildcards are the ECB and Congress.  The former is less relevant on the surface to US investors – though of course crucial to those in Europe – but at a time when investors are highly responsive to moves in the dollar, the relative interest rate policies between two major central banks can have an outsized effect on currency markets.  And because it would justify an article of its own, I’ve largely skipped the crypto hearings that will be occurring in D.C. tomorrow.  The crypto blowups have been mostly self-contained so far, but any grilling of the SEC by Congress is newsworthy.

And by the way, after signaling extreme complacency just over a week ago, VIX is back up to its longer-term trading range.  Some of that may be a recognition about this week’s volatility potential, but it is also important to recognize that the holiday period is leaving the VIX calculation.  Remember, while VIX often acts like a “fear gauge”, it is structured to be the market’s best estimate of volatility over the coming 30 days.  To do that, it uses options with time to expiry between 23 and 37 days.  With each passing day, the holiday period has less significance in the VIX index.  That said, it wouldn’t be surprising if it dropped in the coming days – people still use it as a short-term hedge, and there should be less need for a short-term hedge after this week’s events pass.

VIX Index, 1-Month, 30-Minute Bars

Source: Interactive Brokers