Today’s news is expected to be uneventful, with no major market-moving events scheduled. The final CPI reading for Spain and US MBA Mortgage Applications data are not anticipated to influence expectations.
Federal Reserve Communications
The focus remains on Federal Reserve communications, with Fed’s Goolsbee set to speak at 17:00 GMT. Goolsbee is a voter with a neutral to slightly dovish stance. Fed’s Barkin and Bostic will also be speaking, but their remarks are not expected to impact as they are not current voters and have spoken recently.
Looking forward, the attention shifts to Fed Chair Powell’s appearance at the Jackson Hole Symposium. The key event in September will be the NFP report, with a rate cut looking likely. Only an unexpected strong NFP report might reduce the current 98% probability of a cut to a 50% chance.
This situation could lead to future policy decisions, but for now, the focus remains on upcoming Federal Reserve communications.
With the market pricing in a 98% chance of a rate cut in September, the path of least resistance is clear. The weak July NFP report we saw last week, which came in at just 95,000 jobs, and an unemployment rate ticking up to 4.2% strongly support this dovish stance. For now, this means maintaining positions that benefit from lower interest rates and a potentially weaker dollar.
Given this high certainty, implied volatility on many assets has compressed, especially for short-term options. This presents an opportunity to sell weekly options that expire before the next major catalyst, collecting premium while we wait for more significant events. However, any unexpected hawkishness from Fed’s Goolsbee later today could cause a brief spike, making this a tactical, not a strategic, trade.
Jackson Hole Symposium
The main focus for the next few weeks will be Fed Chair Powell’s speech at the Jackson Hole Symposium. We will be looking for any clues that might challenge the consensus view, which could be a chance to adjust positions. Until then, the market will likely drift, reacting mostly to intraday Fedspeak without establishing a new trend.
The biggest risk to the current setup is a surprisingly strong NFP report in early September. We remember looking back at late 2023, when the market aggressively priced in rate cuts for 2024 only for strong data to force a major repricing. To guard against a repeat, buying cheap, out-of-the-money call options on the dollar or put options on equity indices expiring after the NFP data could be a prudent hedge.
Therefore, the strategy is to hold a core dovish position, while using low volatility to either sell short-term premium or buy longer-term tail-risk protection. Volatility will almost certainly increase as we get closer to the September data releases and the Fed meeting. These quiet days are the time to prepare for that.
