'Whatever the spot selloff catalyst may be in the coming weeks, we would likely see dealers put into short gamma/short vega positioning as the market sells off from the downside they’re recently short to clients. This would also put them in competition with systematics, which remain at high historical equity net allocations.
The mechanical de-risking/de-allocation/de-leveraging of these systematics would act as an additional source of ‘synthetic short gamma’ flows, needing to sell more the lower the market travels.'
Translation:
Dealers are short gamma BELOW ~5226 (my level of bullish above, bearish below) as discussed in my live trading room.
CPI is 8:30AM ET. If the market reaction is to sell-off, the market is at risk of systematic CTA funds joining dealers, who need to delta hedge by selling weakness because they are in negative gamma land.
Above 5226 and it can get spicy to the upside. That's the slight lean for now in options land.
I have a very hard time believing we will get AND STAY above 5236 intraday/this week (this month??.
Ultimately, we need to get/stay above 5250/5264 to negate the bearish Head & Shoulders pattern.
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Macro Musings From Craig, our MacroAdvisor EDGE Manager
Rising gasoline prices has Cleveland Fed Inflation nowcast moving higher again for headline inflation in April. They are now expecting headline CPI in March at 0.34% mom and then for April again at 0.34% mom.
Given the momentum in gasoline prices (which are running higher yoy; light blue vs green line) and the seasonality (expected to run hot into Memorial day), I would imagine we will continue to see upgrades to the April and May headline CPI forecasts in coming weeks.
I also would imagine this starts to show up in survey based metrics of inflation expectations, like the UMich survey which comes out later this week.
Market based measures of inflation expectations have been steadily moving higher all year aided by this move in gasoline. While the Fed looks at core PCE, they will also look holistically at all the inflation data when they are thinking about kicking off what is currently a highly contested cutting cycle.
I still contend Powell doesn't want to start cutting rates with dissenting votes and right now, there are 4 voting hawks standing in his way (Bostic, Bowman, Barkin and Waller).
With headline inflation re-accelerating again, the bar is being raised for the Fed to start cutting rates in June.
If we do get a Core Mom print above .33%, this is what GS estimates for a market reaction.
So now you have the quant bet with macro and micro levels to navigate. Have a great day!
