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Seizing Trading Opportunities with the US July CPI as an Example | Moomoo Research
Recently, the frequent release of U.S. macroeconomic data, coupled with the liquidity crisis caused by yen carry trades and ongoing geopolitical risks, has led to significant volatility in the U.S. stock market. The panic selling triggered by the July non-farm payroll report sent shockwaves through global capital markets, making investors even more attentive to the upcoming U.S. economic data.
Last week, a positive initial jobless claims report once pushed the S&P 500 index to its largest single-day gain in nearly two years, injecting a strong stimulant into the market. However, the US July Consumer Price Index (CPI) data to be released this week will undoubtedly become the focus of the market. If the July CPI data significantly exceeds or falls short of market expectations, it may trigger violent market fluctuations.
Under such a background, in response to the recent changes in macroeconomic data, we need to formulate corresponding trading strategies according to different data conditions. So, how should we adjust our trading decisions based on the fluctuations of these data?
Ⅰ. CPI data could become the trigger for market volatility, with July CPI expected to show further deceleration
On August 14, the U.S. Bureau of Labor Statistics will reveal the July CPI data. The market generally expects inflation to show signs of slowing down, although it has not yet reached the Federal Reserve's 2% target. It is expected that the overall CPI year-on-year growth rate in July will slightly fall to 2.9%, and the core CPI year-on-year growth rate is expected to be 3.2%, both slightly lower than the previous month, marking the lowest level in more than three years.
The decline in the core commodity inflation rate, coupled with the slowdown in wage growth in the July employment data to 3.6%, indicates a reduction in service industry cost pressure and is expected to further promote the decline in the inflation rate. The Cleveland Fed's model even predicts that the CPI year-on-year growth rate in August may fall to 2.7%.
Previously, the Federal Reserve reiterated in the July interest rate resolution statement that it will only consider taking rate-cutting actions when it is more confident that inflation is moving towards the 2% target in a sustainable manner.
Therefore, if the July CPI data slows down as expected, it is expected to add more weight to the rate cut in September; if the data shows unexpected changes, it may trigger market fluctuations.
Ⅱ. In the face of the frequent release of U.S. macroeconomic data, how should investors position their trading strategies?
Inflation levels and unemployment rates are the two core indicators that the Federal Reserve closely monitors, as changes in these indicators not only reflect the health of the U.S. economy but also significantly influence the Federal Reserve's monetary policy.
Going forward, we will categorize the changes in these indicators into three scenarios to explore the investment strategies that investors might consider under different circumstances.
1. CPI growth slows, unemployment rate slightly increases, September rate cut probability increases: Economic stability, "rate cut" trade
Assuming a slowdown in the CPI year-on-year growth rate and a slight increase in the unemployment rate, this can be interpreted as U.S. inflation being well-managed, the labor market remaining stable, and the overall economic environment healthy. Under these conditions, the Federal Reserve could begin to sequentially ease monetary policy, with rate cuts proceeding in an orderly fashion. The market would then trade on the "rate cut" narrative, and we could adopt the following trading strategies:
(1) A rate cut would lead to a decline in Treasury bond yields, benefiting bond price appreciation. According to duration calculations, theoretically, for every one percentage point reduction in interest rates, the price of TLT could increase by approximately 15%. Therefore, we could take a long position in bonds, purchasing bond ETFs such as $iShares 20+ Year Treasury Bond ETF (TLT.US)$ and $Ishares Iboxx $ Investment Grade Corporate Bond Etf (LQD.US)$ . Additionally, we could consider selling put options to collect premium income, while also leveraging cash sweep programs to enhance yield.
(2) A rate cut would lead to the depreciation of the U.S. dollar, benefiting safe-haven assets like cryptocurrencies. Thus, we could take a long position in cryptocurrencies, purchasing Bitcoin ETFs such as the $iShares Bitcoin Trust (IBIT.US)$, $Fidelity Wise Origin Bitcoin Fund (FBTC.US)$.
(3) With economic stability as a premise, a rate cut would favorably impact corporate financing costs, potentially enhancing corporate earnings per share (EPS), and propelling a market rally. Consequently, we could take a long position in broad market indices, purchasing broad market index ETFs like the $SPDR S&P 500 ETF (SPY.US)$ , $iShares Core S&P 500 ETF (IVV.US)$ , and $Vanguard S&P 500 ETF (VOO.US)$ .
(4) With stability in the broader market, a rate cut would likely reduce market panic. Therefore, we could consider shorting volatility through products like $ProShares Short VIX Short-Term Futures ETF (SVXY.US)$ , $-1x Short VIX Futures ETF (SVIX.US)$ .
Taking Strategy 1 as an example, we can calculate the potential return of selling TLT put options combined with a cash sweep strategy.
Assuming an ideal entry price for purchasing TLT below $91, we could sell one TLT put option with a $91 strike price and an expiration date before the September FOMC meeting (September 13). As long as TLT's price does not drop below $91 by September 13, we could earn a one-month premium of $21, with an approximate annualized yield of 2.8%. Meanwhile, the $9,100 in margin could be placed in a cash sweep program to earn an interest income with an approximate annual yield of around 5%.
Collectively, Strategy 1 could yield an annualized return of approximately 7.8%. Even if the option is exercised, it would simply mean acquiring TLT at a lower cost.
2. CPI growth exceeds expectations, unemployment rate remains stable, September rate cut probability decreases: Market volatility
(1) In volatile market conditions, we could consider adopting a contrarian trading strategy, buying on lows and selling on highs.
(2) Given that a rate cut is a long-term trend, the long-term benefits for bond prices would include a theoretical increase of approximately 15% in TLT's price for every one percentage point rate cut, as per duration calculations. Thus, we could continue to hold bond ETFs like $iShares 20+ Year Treasury Bond ETF (TLT.US)$ and $Ishares Iboxx $ Investment Grade Corporate Bond Etf (LQD.US)$; and also generate income by selling high-priced call options.
(3) During volatile market conditions, it is even more crucial to strengthen cash management investments. Investing in cash sweep products and similar offerings can help boost yields.
Taking Strategy 2 as an example, we can calculate the potential return of holding TLT while selling TLT call options.
Assuming that TLT's price is unlikely to exceed $100, we could sell one TLT call option with a $100 strike price and an expiration date of September 13, while holding 100 shares of TLT. If TLT's price does not surpass $100 by September 13, we could earn a one-month premium of $72, with an approximate annualized yield of around 9%, plus TLT's annual dividend yield of 3.72%.
Collectively, Strategy 2 could yield a total annualized return of 12.72%, along with the additional gain from the potential 15% increase in TLT's price due to an average rate cut of 1 point.
3. CPI growth slows more than expected, unemployment rate increases more than expected, September rate cut probability rises significantly: Recession expectations rise, "recession" trade
(1) A rate cut would lead to a decline in Treasury bond yields, benefitting bond price appreciation. As per duration measurements, for every one percentage point rate cut, the price of TLT may theoretically increase by about 15%. Hence, we could take a long position in bonds, purchasing bond ETFs like $iShares 20+ Year Treasury Bond ETF (TLT.US)$ and $Ishares Iboxx $ Investment Grade Corporate Bond Etf (LQD.US)$ , and consider generating income by selling put options, while also leveraging cash sweep programs to enhance yield (as calculated previously, the annualized yield could be around 7.8%).
(2) A rate cut would lead to the depreciation of the U.S. dollar, favoring safe-haven assets such as cryptocurrencies. Therefore, we could take a long position in cryptocurrencies, purchasing Bitcoin ETFs like the iShares Bitcoin Trust (IBIT.US), Fidelity Wise Origin Bitcoin Fund (FBTC.US), etc.
(3) With heightened expectations of an economic recession, a rate cut might initially cause market panic, potentially leading to an adjustment in the U.S. stock market. Consequently, we could consider taking a short position in broad market indices with products like $Short S&P 500 Proshares (SH.US)$ , $Proshares Ultrashort S&P500 (SDS.US)$ and $ProShares UltraPro Short S&P500 ETF (SPXU.US)$ ; $ProShares Short QQQ (PSQ.US)$ , $ProShares UltraShort QQQ (QID.US)$ and $ProShares UltraPro Short QQQ ETF (SQQQ.US)$ .
(4) Amidst a backdrop of economic recession and market panic, volatility is expected to increase. Therefore, we could consider taking a long position in volatility through products like $ProShares Ultra VIX Short-Term Futures ETF (UVXY.US)$.
In such an uncertain financial market, one must possess keen insight and the ability to adjust strategies flexibly. As we have discussed, every fluctuation in macroeconomic data is a test of investors' wisdom and decision-making capabilities.
Whether it's the slowdown in CPI growth or the subtle changes in unemployment rates, each data point is the cornerstone of our investment decisions. Based on this, we have formulated three different trading strategies to cope with possible market changes. These strategies not only consider the market's immediate reactions but also focus on long-term investment planning.
Remember, market volatility provides us with opportunities, and in-depth analysis and wise decision-making are the keys to seizing these opportunities. In this era of information overload, let us not be confused by short-term fluctuations, keep a clear mind, and meet every market challenge with strategy and patience.
Finally, let us conclude this topic with a more mature and rational attitude. Investing is not just a game about numbers; it is an art of understanding the meaning behind these numbers.
Remember, the true investor is the one who seeks opportunities in volatility and finds certainty in uncertainty. Let us move forward with more determined steps towards a wiser investment path.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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HYGWE : should we worry a lower cpi could signal economic slowdown tho not yet recession but would need more action from over cautious and behind the curve FED ... too little too late FED to rescue from recession
Ultratech HYGWE : what is worrying is this one of those emotions again. they've been talking about a recession since covid.
Moomoo Research OP HYGWE : What you said is very reasonable. If there is a recession, the investment opportunities of many investment types will decline, and bonds will be a good choice.