In preparation for tomorrow, wanted to share again the analysis from about two weeks ago on PCE day, and the post-mortem.
It is quite likely that we could see a similar two-part action sequence play out again tomorrow.
We know that there will be an unwind of vol. The unknown is reaction to the CPI print. There are four possibilities:
- Up, and more up: CPI print is bullish, so people start buying and close out hedges. At the same time, vol unwinds, leads to MMs de-hedging in a negative environment (aka vanna rally). One feeds the other and we have an explosive rally. And this can last days.
- Up, then down or flat: This will happen if CPI print is :meh:, but we still have the vol unwind fuel. So we go up some, and then the market returns to regular programming.
- Down, and more down: CPI print is sufficiently bearish, so people sell more and get more hedges. We’re in negative gamma, so MMs hedge on those hedges (Xzibit meme opportunity here) and we spiral down into 3500.
- Down, and then up: I don’t see a situation where this happens. Though it could be down, and then flat, if the print is bearish, but not too bearish.
Three out of four possibilities is not great in terms of predictions, but let’s keep these in mind so that a mid-day reversal does not catch us unawares.