The S&P 500 experienced a rebound last Friday, opening strongly as anticipated. Energy, technology, and some real estate sectors advanced, although the overall market weakened towards the close. The VIX retreated, and riskier bonds did not rally, along with a steady dollar, as rate cut odds for December decreased from previous expectations.
Despite a desire to cut rates in July, the Federal Reserve remains cautious about rate reductions. Inflation is not a pressing issue due to tariffs, and the macroeconomic environment, including the job market and consumer conditions, suggests the Fed should support the economy and real estate.
Anticipated Economic Events
Looking forward, US Fed minutes, CPI, and flash PMI are anticipated, while CPI data will be released by Canada, Japan, and the UK. VeChain is transitioning its consensus mechanism from Proof of Authority to Delegated Proof of Stake. The network faces an overhead pressure signalling a potential 15% downside risk despite maintaining above $0.0150.
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The rebound in the S&P 500 feels fragile, especially with the weakness we saw into the closing bell. The VIX may have pulled back to under 18, but the underlying tension from conflicting bond and dollar signals suggests this is a good time to consider long volatility strategies. We can use options like straddles or strangles to play potential sharp moves in either direction.
All eyes are on the Fed, as the market is now pricing in less than a 50-50 chance of a December rate cut. We’ve seen CME FedWatch probabilities for a cut drop from over 75% in October to around 42% today, a huge shift in sentiment. With key inflation and jobs reports delayed by the shutdown, the upcoming FOMC minutes are the only real guide we have.
Market Strategies
Given the uncertainty, buying downside protection on broad indexes like the SPX seems prudent. We are seeing the CBOE Skew Index creep higher, indicating that other traders are already paying up for out-of-the-money puts. This environment feels a lot like the choppy markets of late 2023, where the Fed’s next move was also anyone’s guess.
We should also look at currency markets, as the USD/JPY pair pushes towards highs we haven’t seen in nearly a year. This dollar strength, driven by shifting Fed expectations, is also what caused gold to plunge below $4,100. For traders, this could mean shorting gold futures or using options on currency ETFs like FXY to bet on continued yen weakness.
We are trading in a data vacuum because of the recent government shutdown, which is why risk appetite faded late last week. This makes the upcoming flash PMI figures even more critical for getting a read on the economy. A weak manufacturing or services number could force the Fed’s hand and trigger a significant market reaction.
