The anticipation of more rate hikes by the U.S. Federal Reserve could spur more volatility ahead, which makes for trading opportunities in the S&P 500 — notably, the Direxion Daily S&P 500 Bear 1X Shares (SPDN).
According to a Yahoo! Finance report, the capital markets are predicting over a 90% chance that a rate hike will take place in July. This is well documented by the CME Group, and there is a “roughly 40% chance at least two more 0.25% rate hikes are announced by the central bank through November.” Most recently, jobs data may be showing signs that the labor market may be cooling, but it might not be enough for the Fed to pump the brakes completely on rate hikes.
“The Fed would need to see more evidence of a sustained cooling of wage growth for it to stay on the sidelines,” economists at Oxford Economics wrote on Friday. “That was not evident in the latest jobs report, which included another month of sturdy wage increases. Workers are still in the driver’s seat as labor conditions, while easing, remain historically tight.”
The CBOE Volatility Index (VIX) is up 9% in the last five trading sessions, which could hint at more volatility ahead. If there are more bumps in the road, trading SPDN could allow for inverse opportunities when the S&P 500 exhibits short-term weakness.
SPDN offers traders an ideal hedging component if they are bullish on the S&P 500. It also minimizes risk with 1x exposure versus double or triple exposure.
Inflation Starting to Ease?
In addition to the jobs reports, the Fed will be keeping a close eye on inflation data. In particular, the Consumer Price Index (CPI) could show signs that inflation is starting to dissipate, providing the impetus for the Fed to potentially decrease the pace of rate hikes.
“We look for the core CPI to downshift alongside a decline in core goods prices,” Wells Fargo’s team of economists said, according to the aforementioned Yahoo! Finance report. “The ongoing improvement in supply chains has helped to ease pressure on goods, and we expect vehicle prices to contract in June. At the same time, core services are likely to stay firm. Shelter inflation is only slowly cooling off, while medical care and recreational services have scope to rebound in June. The Fed will welcome the continued moderation in price growth, though the road back to 2% inflation remains long.”
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