VIX is hardly the end-all and be-all for evaluating risk, but it’s pretty scary these days

Outlook

VIX is hardly the end-all and be-all for evaluating risk, but it’s pretty scary these days. Reuters notes also that “The real volatility this week has been in rates markets, however, with the MOVE index of Treasury volatility hitting its highest since the first week in January. Some worry that the yesterday the 2/10 yield diff briefly went negative again (inversion) and is only a tiny amount positive this morning.

Others are mad that mortgage rates went back up. This looks like plenty of traders in both stocks and bonds are not buying the soft landing story. Bloomberg tries to be cute and calls it “no landing.”

NY Fed Williams still calls it a soft landing in an interview with the FT but lets the cat out of the bag when he says the Fed can continue to cut “over time” and the Sept cut is not “the rule of how we act in the future."

Williams also pinned a target on Thursday’s CPI: The FT reports “If inflation fell even faster than expected, that ‘would call for policy to normalise a little bit more quickly’, he said. Conversely, if inflation stalled, ‘that would call for interest rates to come down more slowly.’

“Williams expected the personal consumption expenditures price index to close in on the Fed’s 2 per cent target next year, but remained wary of shocks, such as those stemming from the Middle East. ‘It’s definitely on my list of risks to the global economy and to inflation in the near term,’ he said of the recent rise in oil prices.”

We tend to skim fast over Fed remarks but this is a doozie. Note Williams names PCE and not CPI, but who’s counting? We think ‘Williams is preparing the ground for no rate cut at all in November, when the FOMC meeting is right after the presidential election.

The needle is not moving, yet. Those predicting the Fed does not move at all in November went from zero a week ago to 12.7% yesterday morning to 11.4% today. Those still expecting 25 bp rose to 88.6%. 

Forecast

Consolidation is the term used for today’s action, which is very common on a Tuesday after a big move the week before. It implies profit-taking and sometimes second thoughts about positions, although usually the same move comes back, if with less momentum. Barring a Surprise from left field, that’s what we expect for the week. The dollar gets some of its gains from geopolitical risk aversion and as noted above about VIX and MOVE, we see a small respite today but overall, rising fear.

Political Tidbit: Harris gave a brief interview to “60 Minutes” that offered nothing new to those following the election but might have reached a wider audience. Trump is the first candidate to refuse the interview, with his campaign saying he didn’t like the idea of being fact-checked. We find it amazing that so many people support someone who is lying to them, including about the government response to the hurricane. FEMA is in a tizzy over being falsely accused of inadequacy. And the NYT published an analysis of Trump’s speech in comparison to 2016, noting it looks like he is falling into old-age problems. His niece, Mary Trump, a professional shrink, says more follow-up is called for.

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