Inflation swaps won again, with today’s CPI report coming in at 3.1% y/y versus the median analysts’ estimates for 2.9%, while inflation swaps were looking at 3%. The bigger shock was that core CPI came in at 3.9%, which was higher than estimates for 3.7% and in line with December’s reading, suggesting the pace of disinflation may have stalled. The CPI report was just filled with surprise in January, from the headline to the core to the supercore, which rose a jaw-dropping 0.85% during January, its biggest advance since the spring of 2022.

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The report sent the odds for a rate cut in March down to just 10%, with the market now pricing in less than four rate cuts by December. The market had been pricing in more than 7.5 rate cuts, just a few weeks backs.

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It sent rates across the curve sharply higher, as the 10-year quickly increased and is back above 4.3%. At this point, where rates go is a big question because I could easily argue that as long as the labor market stays tight, GDP remains strong, and inflation stays elevated, the 10-year should be trading much higher than the 2-year and may be higher than Fed Funds. But right now, there is a level of resistance at 4.35%. If the 10-year gets above 4.35%, then it is off to the races, and we could be looking at a 4.7% number soon.

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This sent the S&P 500 lower today by around 1.4% and sent the VIX screaming higher. The S&P 500 fell sharply from the rising wedge pattern highlighted in the last few days. The index managed to find support and bounce right off the 61.8% retracement level when measuring from the base of the wedge. Technically, the target falling out of the wedge should be the 4,850 level, but from a bearish point of view, I don’t like that the index found support and bounced at the 61.8% retracement level. It is also Opex this week, and many calls could be in trouble at 5,000 if the index doesn’t rally. I guess I am saying that it wouldn’t surprise me to see the S&P 500 rise back to that 5,000 level and fill the gap created today.

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Meanwhile, the VIX rocketed higher today ahead of Opex tomorrow morning. There was a lot of open put delta in the VIX heading into the CPI report. Once the VIX started moving, those puts started losing value quickly, resulting in market makers probably covering hedges and pushing the VIX higher. As the VIX increased to around 16, calls gained value. They started a feedback loop, sending the VIX higher. We only saw the S&P 500 rally in the final 30 minutes because it looked like the VIX flows died out right around 3:30. The S&P 500 was down about 2% at 3:30 PM ET.

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Nvidia’s IV keeps rising, and right now, the 105% moneyness options are trading nearly 1.25% percentage points higher than the 95% moneyness options, which is pretty wide. Given there is still about a week until earnings, the IV will probably go even higher, and who knows, maybe the stock will, too, but the higher the stock and IV go, the worse the outcome is likely to be when the company reports results, and that’s if the results are good. Unless they have a trick, like issuing a token dividend as Meta did.

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