Put/call ratio first:
The white arrow shows where the put/call ratio started the week of the Powell speech for August vs. present.
Notice that going into the August speech, after a hunky dory post-FOMC conference in July, investors were actually looking forward to Powell giving them more ammunition on the upside. They were buying calls into the Jackson Hole speech without much hedging.
Today it's the polar opposite. We have an uptrending put/call into Powell's speech tomorrow, as investors are hedging the speech.
This type of pre-event hedging action typically leads to unwinds of those hedges once the event is finished, as the monster in the closet is a lot less scary once you open the door.
The next two charts demonstrate why irrespective of how Powell comes across tomorrow, he will have to acknowledge that the future path of tightening will be of less consequence than what they have done the past few meetings. In other words, no more 75 bp hikes. The upward velocity of rate hikes is finished.
Here is the USD:
Uptrending in August. Downtrending at present.
The foundation of the inflation argument has shifted. This means that there are very large amounts of capital restructuring their portfolios around a post-inflationary world. The restructuring of portfolios against such a massive macro trade as inflation has been over the past 12 months always begins with the largest market of all, which is the global currency market.
Third are interest rates:
Above trend with positive upside momentum in August. Below trend with positive downside momentum at present.
Rates have now shifted from betting on greater inflation to betting on a timeline for rate hikes to end.
All Powell has to say tomorrow is that the velocity of rate hikes is set to drop, confirming what both USD and rates are telling us.
That alone will set off an unwind of all the hedges that have been taken going into tomorrow's speech.
Remember, this isn't the market of August, June or March.
Back then none of us had any idea how far Powell would go, or how high the velocity of rate hikes would get. Now that we are on the back end of the rate hiking curve, he can be as hawkish as he wants tomorrow, but he will have to acknowledge that the velocity of hikes is set to drop....and that is all it will take.
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