If Federal Reserve Chairman Kevin Warsh was hoping to alarm the bond market, he certainly got his wish on Friday. After Mr. Warsh’s speech in Jackson Hole, the chance that the central bank will raise rates at its September meeting jumped from just 35 percent on Thursday to nearly 60 percent, according to federal funds futures odds tracked by CME Group.
That could be a welcome surprise for the Fed. There are strong signs that stock traders seem to be accepting this.
of CBOE Volatility Index (VIX)The index, which measures the price of 30-day options on the S&P 500 index, fell to 14.1, its lowest reading in a year, in the wake of Mr. Warsh’s first trade at the annual symposium.
Stocks were lower at midday as Nvidia stock recouped some of its big gains, but the S&P fell three-tenths of a percent, about half the range of about 60 basis points suggested by options pricing in Friday trading. US stocks looked particularly strong when compared to Bitcoin and gold, each down at least 2.5%. This is further evidence that investors across asset classes are bracing for rising interest rates.
“The VIX is low because even without aggressive interest rate hikes, the Fed, which is wary of inflation, is seen as a positive for the economy by keeping inflation in check, which is bullish for stocks,” Ben Emmons, managing director at Highline Asset Management, said in a text statement.
CBOE Volatility Index Year-to-date
A more comprehensive look at S&P 500 volatility, which includes options expiring beyond the VIX range, suggests the effects of rising interest rates may not be seen for several months, argues Mandy Hsu, head of derivatives market intelligence at Cboe.
“Uncertainty surrounding the path of inflation and interest rates will impact long-term stock price volatility, which is why SPX’s term structure has become so steep,” Xu said in an email.
The price spread between six-month and one-month options on the S&P 500 is currently at the 96th percentile over the past year, according to Cboe data.
According to ThinkOrSwim data, VIX futures prices in late February are currently around $21, while active contracts are priced at just under $16.9. This curve is significantly steeper than it was a month ago, when there were around 20 contracts last month. Still, the entire curve is shifting downward as volatility generally subsides.
“The Fed is technically still in easing mode,” James Perry, founder and chief investment officer of Perry International Capital Partners, said in a text. “If oil prices fall, inflation expectations will fall further.”
