Caution Signs: Volatility Ticks Up, Yields Sink as Rate Increase Chances Grow

Caution Signs: Volatility Ticks Up, Yields Sink as Rate Increase Chances Grow

Key Takeaways

    Volatility could pick up again today amid quadruple-witching, caution ahead of weekend 

    Next week’s FOMC meeting comes into focus: Are markets ready for another rate hike? 

    Consumer sentiment reading due soon after today’s open could shed light on future demand 

Alex Coffey, Senior Trading Strategist, TD Ameritrade

(Friday Market Open) As the weekend nears, market participants are building in strong chances of a 25-basis-point rate hike at the Federal Open Market Committee (FOMC) meeting next week. The question is whether it’ll be the last upward move in this now yearlong cycle. There are many indications it could be, but things can change quickly.

Absent any major setbacks and surprises, it seems increasingly likely the Fed will start looking for an off-ramp in light of recent instability within the banking sector. While inflation does still complicate the situation, we have started to see some signs of reprieve on that front.

Typically, but not always, trading becomes a little dull ahead of interest rate decisions, with investors and traders waiting until the news is out to make moves. But because this time the decision seems a bit less certain, we could see continued tension in the markets leading up to the meeting.

While Wall Street seems to be on more solid footing now after the recent turmoil, traders should consider using extra caution going into the weekend. The first and last hours of trading today could get volatile, and you might want to wait for the dust to settle. Things could also shift quickly in Sunday night’s futures trading.

All this could be exacerbated by today’s quadruple witching—when contracts for stock index futures, stock index options, stock options, and single-stock futures all expire. Traditionally, this has caused volatility, but due to certain market adjustments it’s not as big a deal as it once was.

Just in

Things could change, but Wall Street begins Friday on pace for a winning week despite a dip in futures this morning. Globally, it’s vice-versa, with most indexes lower for the week but up today. The European Central Bank (ECB) continues to focus on fighting inflation, judging from comments an ECB policymaker made earlier today, and the Eurozone’s February Consumer Price Index (CPI) rise of 0.8% announced Friday shows why. Inflation there is up 8.5% year-over-year—worse than the U.S. reading. The ECB raised interest rates by 50 basis points yesterday, as analysts had expected it would.  

Morning rush

    The 10-year Treasury note yield (TNX) fell 9 basis points to 3.49%.The U.S. Dollar Index ($DXY) is down slightly at 104.18.The Cboe Volatility Index® (VIX) futures are up slightly at 24.08.WTI Crude Oil (/CL) rose slightly to $68.83 per barrel.

Eye on the Fed

Markets price in a nearly 80% likelihood of a 25-basis-point Fed rate hike next week, according to the CME FedWatch Tool. There’s also a 20% probability of a pause, the tool says. Yesterday’s 50-basis-point interest rate hike from the European Central Bank (ECB) reinforced ideas that the Fed would execute its own increase.

“The ECB’s decision to raise rates gives the Fed cover to follow suit, focusing on the fight against inflation while also mentioning that they are monitoring financial stability closely,” says Collin Martin, a director of fixed income strategy at the Schwab Center for Financial Research.

As the Fed considers its move, inflation remains a worry and there’s also concern about possible tightening in the credit market, a scenario that could slow the economy. The Fed has many plates spinning in the air ahead of the meeting.

From Wall Street’s eye view, a hike might be welcome since it would suggest there are no surprises out there about to clobber the market again. However, regardless of the rate decision next week, futures trading suggests the hiking tune the Fed began humming a year ago is nearly at its crescendo.

“Given the impact of the banking situation—tighter lending standards, investor and consumer concerns—it seems unlikely that the markets will begin to revise up their peak fed funds rate expectations anytime soon,” Martin says. “Monetary policy acts with long and variable lags—and it seems like the lags have arrived.”

Treasury yields help tell the story. They’ve fallen sharply this week, with the rate-sensitive 2-year Treasury yield near 4.13% early Friday, down from a 15-year high above 5% earlier this month back when many investors anticipated a 50-basis-point rate increase. The futures market currently puts the highest likelihood on next week’s hike—if it happens—being the last of the cycle and rates coming down again later this year.

This may also explain the massive rallies in both precious metals, like gold, and cryptocurrencies, like Bitcoin. Bull cases for both gold and Bitcoin often start with a need for an alternative to the U.S. dollar, so the recent uneasiness naturally might have piqued some interest in these assets.

What to Watch

The University of Michigan reports preliminary March Consumer Sentiment soon after the open. Analysts expect slight improvement, albeit near historically low levels. The consensus for headline sentiment is 67.2, up from the final February reading of 67.0, according to

Beyond the headline, consider watching inflation expectations in the report. Last time out, year-ahead inflation expectations were 4.1%, up from 3.9% in January. That felt a little unsettling. Five-year expected inflation was 2.9%, unchanged from January.

The Week ahead: After two weeks of critical data, including payrolls, inflation, retail sales, and sentiment, next week could feel like a refreshing spring break (if it weren’t for the little matter of the Fed meeting, of course).

Numbers-wise, the only major report is Tuesday morning’s February Existing Home Sales data. It follows the better-than-expected Housing Starts and Building Permits that came out yesterday and reinforced ideas of an improving home market. Lower Treasury yields and falling mortgage rates could be another tailwind, but keep in mind that in February, when the data were collected, mortgage rates were on the rise.

Stocks in Spotlight

FedEx (FDX) delivered solid bottom-line results and guidance late Thursday, and that was enough for a premarket rally despite missing analysts’ estimates for revenue. While the delivery business isn’t out of the woods, FDX’s results appeared to show the company making progress in its cost-cutting measures, something that could improve operating margins and perhaps pull through to the bottom line in future quarters.

Earnings go into a slumber early next week before the alarm clock rings Thursday with earnings expected from Accenture (ACN), Darden Restaurants (DRI), and General Mills (GIS).

Market minutes

Here’s how the major indexes performed Thursday:

    The Dow Jones Industrial Average® ($DJI) rose 372 points, or 1.17%, to 32.246.The Nasdaq 100® (NDX) climbed 2.69% to 12,581.The Russell 2000® (RUT) rose 1.45% to 1,771.The S&P 500® index (SPX) added 68 points, or 1.76% to 3,960.

Thursday was comeback day on Wall Street. Stocks rebounded thanks to reports that rescue packages are being organized to support several struggling lenders, though banking shares remained volatile.

Investors appeared to switch back to “risk-on” mode, sending information technology, communication services, and financials sector stocks to daily gains of 1.9% or better. Consumer discretionary wasn’t far behind, while defensive sectors like utilities and consumer staples brought up the rear.

A couple takeaways:

    VIX cratered Thursday but remains near the highs of last month (prior to the banking uncertainty), illustrating that uneasiness remains.Nasdaq names, particularly the mega cap tech giants, have performed nicely the last few sessions as investors flock to names that they trust due in part to perceived strong market positions and strong capital positions to potentially weather economic uncertainty.

Also, after Thursday’s close, the Fed announced that banks looking for cash borrowed $11.9 billion from the Fed’s Bank Term Funding Program set up this week to provide liquidity, in addition to the $148.3 billion net discount window borrowing. Both appear to be signs that the Fed is prepared to provide the liquidity necessary to help stabilize the banking system.

Talking Technicals: The SPX, helped by a powerful performance from so-called “mega-caps” that have a heavy influence on the index due to their size, posted a one-week high back above the 200-day moving average (MA) of 3,937, an important technical move following four consecutive days closing below that point. That was the longest streak of sub-200-day MA closes for the SPX since early January. However, the SPX remains well below the 50-day moving average of 4,006, and below the psychological 4,000 mark that the SPX has pivoted around for so many weeks like a moth near a flame. The SPX hasn’t closed above 4,000 since March 6.

Caution Signs: Volatility Ticks Up, Yields Sink as Rate Increase Chances Grow

CHART OF THE DAY: PERISCOPE ABOVE WAVES.  The S&P 500 index (SPX—candlesticks) poked back  above the 200-day moving average (blue line) after spending several days beneath that important technical metric, but remains a ways below its 50-day moving average (red line), which roughly corresponds with the psychological 4,000 level. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

PPI down, not out: While the Producer Price Index (PPI) fell slightly in February along with retail sales, it’s important to remember that the Consumer Price Index (CPI) remained firm in February. If wholesalers are seeing lower prices, they’re not passing them along to consumers in any major way. That could change, because sometimes it takes several months for wholesale prices to filter through to store shelves. Also, keep in mind that these inflation reports represent a single month, not a trend. Wednesday’s relief about PPI follows more than a month of investor and Fed handwringing over sharply higher-than-expected January inflation. A look at the year-over-year inflation numbers might be more helpful if you’re trying to find a trend, as month-to-month data remain so volatile.

Pay up: Want to enjoy your videos commercial-free? Time to dig a little deeper, Alphabet (GOOGL) told its YouTube subscribers Thursday. The monthly price rises from its current $64.99 to $72.99 effective April 18, 2023, according to an email sent to subscribers on Thursday. “As content costs have risen and we continue to invest in the quality of our service, we are updating our price to keep bringing you the best possible service,” Alphabet says in the email. Its shares jumped more than 4% Thursday, though the YouTube news was just one reason for the leap in a general tech rally. Don’t be surprised if other large companies follow GOOGL’s example on subscription costs, too. Analysts have been predicting for months that Costco (COST) will raise the price of its Gold Star membership, for instance. In fact, COST’s CFO recently told investors, “It’s not a question of if, but when,” according to coverage in The Hill earlier this month.

Law’s impact: The Inflation Reduction Act—a sweeping $750 billion effort to address inflation by reducing health care costs; to bring down the federal deficit by bolstering tax collections; and to combat climate change by encouraging domestic clean-energy production—passed Congress and was signed into law by President Biden last year. Find out which provisions of the act may affect you in the near future, according to Michael Townsend, managing director of legislative and regulatory affairs at the Schwab Center for Financial Research.


March 20: No major data or earnings.

March 21: February Existing Home Sales and start of 2-day FOMC meeting.

March 22: FOMC rate decision.

March 23: February New Home Sales and expected earnings from Accenture (ACN), General Mills (GIS), and Darden Restaurants (DRI).

March 24: February Durable Orders and Durable Goods.

Happy trading,                                  


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