S&P® Index Volatility Surface Embeds ½ Point FOMC Intraday Volatility Premium

Link to Report: Macro Volatility Digest

WHAT STANDS OUT:

• Moderating inflation data (core CPI = 2.5% yoy, its lowest level since Feb 2021) sparked a V-shaped bottom reversal in US equities with the S&P rebounding to within a hair’s breadth of all time highs. Ahead of this week’s FOMC meeting, Fed Fund futures are currently pricing in a 60% chance of a 50 bps cut and the 2Y Tsy yield has tumbled to 3.58%, a two-year low. Rates volatility has pulled back significantly with the MOVE Index down 6.6nms to 100.6 bps vol (31st percentile).
• The efficacy of the implied volatility skew was tested as the S&P completed a 8.3% roundtrip over the last two weeks. In face of this sizable market whiplash, we find the S&P volatility surface to be surprisingly stable. The current 1.5 VIX® Index point premium vs Aug 30 consists of 4 components with ½ a VIX point attributable to an intraday volatility premium on Wednesday’s FOMC decision.
• We quantify the impact of gamma hedgers with respect to NVDA’s +8.8% rally on Sept 11. We find that gamma rebalancing was at most, responsible for 7% of NVDA’s daily volume on Sept 11. Bloomberg’s transaction cost model estimates the price impact of 7% of ADV ranges between $0.62 and $0.74 depending upon the urgency of the execution. 
• Chart: Fed Fund Futures are roughly pricing 50/50 expectations for 50bps cut. As shown below, such irresolute scenarios often result in high intraday volatility post-announcement.

Source: Bloomberg

Chart: The S&P Volatility Surface Currently Embeds a ½ Vol Point Premium to Account for FOMC Intraday Volatility

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