Even though both headline and core CPI came in hot, and bonds immediately priced in an additional 25bps at least, we ended up retracing a whooping 5.5% after falling 3.5% on the news. The initial drop is consistent with the news; the rally afterward is not.
This likely demonstrates how positional flows can overtake actual news effects after the initial news as been priced in, which the market did for the first hour. It’s also quite interesting that the sell-off stopped right around 3500, which was the strongest support level today, at least as far as gamma levels are concerned. Here’s SG explaining this:
Here’s the corroborating realtime vol drop:
For what it is worth, we still have some vol left in the tank. Some of it should be related to the UK situation. This implies that if that is resolved (well enough) tomorrow, we could have a continuation of the rally from just positional effects.
