Firstly, to contextualise the current landscape, a look at a range of implied vol measures is worthwhile – the VIX trades with a 14 handle, below the 12-month average just shy of 16%; BofA’s MOVE index remains pinned at the bottom of its 18-month range; JPM’s global FX vol index sits at its lowest since 2021; while, implieds tracking both gold and crude ETFs have also slumped to fresh lows.
I see three reasons, or perhaps assumptions, as to why vol is at present so low.
Firstly, there is simply a lack of impactful news- and/or data-flow at present. Markets adeptly navigated NVDA earnings last week, and since, despite a high volume of headlines, there have been few of any note to significantly move the needle. Furthermore, the latest deluge of Fed speakers have pretty much all stuck to the now-familiar script, in that it will likely be appropriate to cut later this year, but that more data is required before doing so. In short, there’s been a lot of noise, but very little signal.
Secondly, is the assumption that disinflation will continue, albeit perhaps in relatively bumpy fashion, as the year progresses. The US CPI fixings market (shown below) evidences this well, though such disinflation will – as discussed at some length recently – require services disinflation to quicken, with fading price pressures in the goods side of the economy having done much of the heavy lifting thus far.
Thirdly, is the assumption that G10 central banks will begin to ease policy in the summer, and continue to move back to a more neutral stance over the following 12-18 months. Although USD OIS has priced out around 80bp of 2024 cuts since the turn of the year, the curve is still broadly in line with the aforementioned easing bias, albeit with the cycle beginning a few months later than had been expected six or seven weeks ago.
Given these assumptions, it is prudent to question the risks markets face, and the key dates that may influence said risks:
In sum, though, unless and until the aforementioned risks do materialise, the supportive policy backdrop, and ‘goldilocks’ US macro landscape with a soft landing still on the cards, should keep the path of least resistance for risk assets leading to the upside.
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