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Seatbelts Fastened: Volatility Expected In The Coming 30 Days

By Mike Zaccardi, CFA, CMTMarket Overview15 minutes ago (Oct 10, 2022 10:13)

The September jobs report was the first market-shaking event for volatility traders
CPI, Retail Sales, and corporate earnings begin this week
FOMC rate decision and the U.S. midterm elections take place in early November
The VIX curve is in backwardation and could grow further inverted

It’s going to be a humdinger of a month ahead. The next 30 days feature several significant events that will keep traders on their toes. 

The fireworks really get going on Thursday morning this week when the September CPI report hits the tape. Falling oil and gasoline prices during last month will undoubtedly help to cool the hot consumer price picture but lagging housing and rent data will continue to put upward pressure on CPI. 

Another general gauge of the demand side of the equation comes Friday morning with last month’s read on Retail Sales. It will be interesting to see how rising prices at the pump play into the same gauges in November.

This Week’s Data Deck

Economic Data

Source: BofA Global Research

Third-quarter earnings season also begins this week. Partially in jest, I like to say that the reporting period kicks off with PepsiCo (NASDAQ:PEP) while most financial pundits claim JPMorgan Chase (NYSE:JPM) marks its beginning. Regardless, the corporate earnings situation will certainly be a major focus—not so much concerning bottom-line results, but more about forward guidance. Moreover, a key issue the bears want addressed is the current earnings forecast. 

Corporate Earnings Next Three Weeks

Earnings Preview

Source: Wall Street Horizon

As of now, according to senior earnings analyst John Butters at FactSet, the S&P 500 is expected to produce nearly $224 of EPS this year and $241 in 2023. In all, there will be reads on the airlines, consumer, semiconductor industry, and of course the banks.

S&P 500 2022 and 2023 EPS Forecasts

Source: FactSet

What else is on the 30-day horizon? Let’s not forget about the next Federal Reserve meeting which is just three weeks away. Following the September jobs report that was on the hot side, traders now price in an 81% chance of yet another 0.75 percentage point rate hike at the FOMC meeting on Nov. 1-2. 

An increase of that amount would bring the Fed Funds target rate to the 3.75% to 4% range—not far from where the market prices in the terminal rate. For investors, that means we’ll be able to earn upwards of 3.75% by just parking cash in a money market mutual fund. 

Fed Funds Futures: A High Chance of a 75 Basis Point Hike

Fed Funds Futures

Source: CME

That’s not all, folks. 

The U.S. midterm elections take place on Tuesday, Nov. 8. As it stands, the Republicans have a more than 80% chance of retaining control of the House of Representatives while the battle for the Senate majority wages on. 

A month ago, the betting market priced in a two-in-three probability that the Democrats would keep Senate control, but the GOP has gained steam—perhaps as the economy continues to weigh on the electorate’s mind and with gas prices back on the way up.

Political Uncertainty: Coin Flip for the Senate

US Political Uncertainty

Source: PredictIt

A lot to look forward to in the next 30 days, right? But why is 30 days the key timeframe for traders? That’s how far the VIX looks out. Not surprisingly, the VIX futures curve is inverted with the October contract trading above November and December. 

Many market analysts want to see steep backwardation in the VIX futures’ term structure to suggest true capitulation in stocks. But that’s an article for another day.

VIX Futures: Backwardation Means Volatility Should Remain Elevated through mid-November

VIX Futures

Source: VIX Central

The Bottom Line

Expect more volatility ahead as key economic data, important corporate earnings, a pivotal Fed meeting, and ruckus mid-term elections all happen in the next 30 days. VIX traders rejoice.

Disclaimer: Mike Zaccardi does not own any of the securities mentioned in this article.

Seatbelts Fastened: Volatility Expected In The Coming 30 Days

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