Macro Options 09/02: Data pointing up or down?

As Viet Hustler noted in last week's newsletter, macro factors have begun showing bad signs for the market in general as Jerome Powell continues to affirm the FED's firm determination to curb inflation, including continuing to raise interest rates after the September meeting and not starting to cut interest rates until the end of 2023. However, similar to the summary of Powell's speech, Viet Hustler pointed out that one of the FED's concerns is “inflation expections” from businesses and people, so investors may somewhat believe that the “hawkish” tone on Friday was intended to crush the current “inflation expectation”. In this week's macro options newsletter, Viet Hustler will focus on the reaction of derivatives markets after Powell's speech.

1. VIX Futures:

VIX can be considered the closest forecasting indicator of last week's event. Viet Hustler commented that VIX would rise during the week due to increased hedging demand before Jackson Hole, and Bloomberg confirmed traders piled into buying VIX calls on Thursday right before the speech:

After Powell's speech, VIX futures surged strongly on Friday, however, it only returned to the level from the previous Monday, even though the overall market dropped quite deeply compared to the start of the week. This suggests VIX could continue rising quite high if fear sentiment persists in the market, especially from continuous speeches by FOMC members next week.

In addition, here is a comparison of similarities between the current VIX and the period right before the 2008 market crash:

2. Interest Rate Futures:

Right after Jerome Powell finished his speech, the market began pricing in interest rates at 3.65% by the end of this year, meaning at least 2 more rate hikes from the current 2.50%. Meanwhile, expectations for rate cuts in 2023 remain unchanged, indicating:

• The market agrees and believes that the FED may raise rates until the end of 2022.

• However, investors have not abandoned hope that the FED will cut rates in 2023, despite Powell saying rates will be “higher for longer”