SignalPlus Volatility Column (20240815): CPI Hides Surprises

Yesterday (14 AUG) marked the highlight of this week—the release of the U.S. CPI data. The data showed that the U.S. seasonally adjusted CPI year-on-year rate at the end of July was 2.9%, falling for the fourth consecutive month, marking the first return to the "2" range since March 2021, slightly below the market expectation of 3%; the core CPI year-on-year rate was 3.2%, in line with market expectations. However, digital currencies faced a significant drop after the data was released, with BTC falling from 61,000 to 58,000, a decline of over 5%. Ethereum initially showed strong resilience, retreating to 2,650 before stabilizing, but fell again to just above 2,600 a few hours before the close, with an intraday decline of nearly 5%. Some traders questioned this, believing it was not the expected reaction to a "meet expectations" CPI. Furthermore, as a highly correlated pair, ETH usually experiences more volatility than BTC, leading to some surprise regarding yesterday's market performance, which we will explore further.

Source: SignalPlus Economic Calendar; TradingView

After the CPI was released, the U.S. ten-year Treasury yield initially rose and then fell, gradually increasing throughout the day. This indicates that after the previous day's PPI release, the market's expectations for the CPI were overall lower than expected, making this result disappointing for a dovish market. A closer look at the report reveals that the most disappointing factor for the market may be the accelerated rise in rents: the "owner's equivalent rent" in June had just reached the lowest level since 2021, but in July, this indicator accelerated to 0.36%, while housing prices rose by 0.4%, compared to just 0.2% in June, raising market concerns. However, since this indicator has a slightly lower weight in the PCE index favored by the Federal Reserve, it will be slightly lower than the CPI. Orion's Chief Investment Officer Rusty Vanneman believes that the possibility of a rate cut in September remains high, but the current inflation issue is trickier than the Federal Reserve expects, necessitating a reassessment of the likelihood of a 50 basis point rate cut in September.

With inflation data successfully falling below 3%, investors can shift their focus from inflation to economic growth and employment. Brandywine Global investment manager Jack Mcintyre stated, "The U.S. CPI data is important, but in terms of its impact on the market, it may rank third among economic data—after employment numbers and retail sales—so it is less significant." Retail data will be released tonight, and the volatility at the front end of options remains flat, reflecting this uncertainty.

Source: Investing

In another piece of news, the U.S. government transferred 10,000 bitcoins to CoinBase Prime, raising market concerns about potential selling, which also led to a decline in bitcoin prices. From the options trading perspective, there has been a significant demand for put options in BTC in the short to medium term, resulting in an overall decline in the Risky front end. In terms of overall volatility levels, ETH's front-end implied volatility ended a noticeable decline after the CPI release, while BTC maintained an upward trend under higher actual volatility and uncertainty from potential selling pressure. Tonight's U.S. retail data will once again test the cryptocurrency market.

Source: SignalPlus, overall decrease in BTC RR

Source: SignalPlus, BTC trading distribution

Source: Deribit (as of 16 AUG 16:00 UTC+8)

Source: SignalPlus