holiday sale bannerholiday sale banner

Zooming out before the FOMC

November 2, 2022

Today we will get one of the most anticipated FOMC meeting of the year with traders expecting a 0.75% rate hike to take short term interest rates to 4%.

Over the past few weeks, market discussions have centered around the possibility of a pivot by the FOMC either at the November or at the December meeting.

In today’s market update, we want to take some time to study how assets have reacted over the past few weeks going into today’s meeting.

Fixed Income

Short bonds proxied here by the US ETF SHY are at their lowest level of the year with the 2-year US Treasuries trading with a yield of 4.55%.

Ivolatility spot price chart

Intermediate bonds have rallied a little bit but remain close to their lows of 2022. We proxy them by looking at IEI and 5-year US Treasuries are trading with a yield of 4.26%.

Ivolatility spot price chart

Finally, long bonds have rallied the most over the past few weeks and have so far managed to stay off their lows.

Ivolatility spot price chart

10-year yields are at 4.04% (vs a high of 4.33%) and 30-year yields are at 4.1% (vs a high of 4.42%).

Combining all that information is quite interesting with short dated rates implying further rate hikes while longer dated ones seem to indicate a cap on long-term yields.

This could still indicate that the central view in the market is one where the FED is forced to initiate a recession in the short-run in order to control inflation. The fact that long-term yields remain anchored could arguably be seen as trust by market participants that the FED will do whatever it takes to fix the inflation problem and that it will probably succeed.

Equities

US indices as well as European indices have bounced more than 10% from their lows in October.

Ivolatility spot price chart

Tech stocks have struggled a bit more as seen in the performance of the NDX but it seems that the earnings season has provided some comfort to investors around the fact that some segments of the economy were holding up pretty well in the current environment.

Ivolatility spot price chart

The Energy sector has performed fairly well over the past 20 days for instance.

Ivolatility spot price chart

Industrial stocks have also performed relatively well since the SPX bottomed in mid-October.

Ivolatility spot price chart

On the downside, communications stocks have struggled following very disappointing earnings.

Ivolatility spot price chart

Overall, Equity markets paint a mixed picture with a potential interpretation being that investors feeling slightly reassured about the recent earnings season that at least for now, the pain is being felt only in a handful of industries and is not yet widespread.

Volatility

Implied volatility has deflated as shown below with the 30d IVX on the SPX.

Ivolatility spot price chart

Once again, this could be a sign that traders are getting more comfortable about the predictability of the current market situation. The FED seems to have things under control (at least according to the Fixed Income market) and companies are not under that much pressure (at least compared to what was feared only a month ago).

At the same time as implied volatilities have dropped, Historical Volatility has also deflated as seen below with the 20d HV on the SPX.

Ivolatility spot price chart

Looking at the term structure of volatility, we note the following:

  1. In the short-run the market is still expecting a lot of action. This is probably due to the FOMC meeting and the significance of this week from a macro release perspective.
  2. Intermediate volatilities have dropped the most with 30d IVX moving from 29% to 25%.
  3. Longer dated IVs have remained fairly steady with some very long-term volatility expectations even increasing.
Ivolatility spot price chart

Is the market pricing a scenario where concerns have been pushed out, possibly in the form of a recession around 2023/2024. In any case, it seems that traders are getting more comfortable with the current situation and the next few months.

Disclaimer - This information is provided for general information and marketing purposes only. The content of the presentation does not constitute investment advice or a recommendation. IVolatility.com and its partners do not guarantee that this information is error free. The data shown in this presentation are not necessarily real time data. IVolatility.com and its partners will not be liable for any loss or damage, including without limitation, any loss of profit, which may arise directly or indirectly from the use or reliance on the information. When trading, you should consider whether you can afford to take the high risk of losing your money. You should not make decisions that are only based on the information provided in this video. Please be aware that information and research based on historical data or performance do not guarantee future performance or results. Past performance is not necessarily indicative of future results, and any person acting on this information does so entirely at their own risk.
Back to All News articles