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The S&P 500 fell by another roughly 75 bps on the day. The index fell below support at 5,600, creating an opportunity for a drop to 5,400. Of course, tomorrow will be a big test. No break of support is valid unless there is confirmation, and we will need to see a further move lower tomorrow.
The CPI report tomorrow makes things a bit more complicated, and the VIX 1-day closing at 30 also makes things more complex. I think it creates an opportunity for a volatility crush once the news comes out, but with all the noise in the background, it is impossible to determine how much of the CPI report is accounted for on the VIX 1 day. More recently, the VIX 1day has only dropped around 8 to 10 handles at the open daily, so a monster rally after the CPI report doesn’t seem likely.
I’m not even sure the CPI report matters much, given it is for February, and many things are changing rapidly on the fiscal policy side. I could imagine a scenario where the CPI comes in hotter than expected, really creating stress in the market because of stagflation fears. But as of tonight, I am seeing nothing from the swaps market that suggests a hot CPI report is in store for tomorrow. Swaps are priced at 2.9% y/y, which aligns with the analyst’s estimates. Swaps have been pricing at 2.9% now for what feels like weeks.
Credit spreads are waking up and starting to move. Where this all goes is yet to be seen, but more importantly, it has broken above a down and two levels of resistance. If the breakouts are real, it would seem that the CDX 5-Year HY index could be heading to 400.
Right now, this is just a tough market, and I think, more importantly, the deleveraging process is still ongoing and could continue for some time longer.
-mike
Terms by ChatGPT
1. bps (Basis Points) – A unit of measure in finance equal to 1/100th of a percentage point (0.01%). “75 bps” means a 0.75% move.
2.Support Level – A price level where a stock or index tends to find buying interest, preventing further decline. A “break of support” suggests a potential further drop.
3.VIX 1-Day – A measure of expected stock market volatility over a single day, derived from S&P 500 options pricing.
4.Volatility Crush – A sharp decline in implied volatility, often after a major news event (e.g., CPI release).
5.CPI (Consumer Price Index) – A key inflation measure tracking changes in the price of a basket of goods and services.
6.Stagflation – A rare economic condition characterized by stagnant growth, high inflation, and high unemployment.
7.Swaps Market – A financial market where interest rate swaps, credit default swaps, and other derivative contracts trade, reflecting investor expectations.
8.CDX 5-Year HY Index – A credit default swap index tracking the cost of insuring against default in high-yield (junk) bonds over five years.
9.Credit Spreads – The difference in yield between corporate bonds and risk-free government bonds, used as a measure of credit risk.
10.Deleveraging – The process of reducing debt, often through asset sales or cutting leverage in financial markets.
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