The Federal Open Markets Committee (FOMC) is scheduled to release a new policy statement on Wednesday, July 26 and the markets expect another 25 bp hike to the target rate. As of this writing, the Bloomberg WIRP function shows the odds of a hike at 97.2%. Also, the same data shows the market consensus is this is the last rate hike for this cycle. The figure below is a daily chart showing the odds of a hike at the July meeting going back to the last meeting on June 14.
Note on the chart above the odds of a hike consistently trend higher as the next meeting approaches. However, our focus is on the market reactions to these releases and a first look appears below. This chart shows the one-day price change for the Nasdaq-100 (NDX) on FOMC announcement dates going back to January 2022. At first glance the diminished reaction to FOMC announcements in 2023 versus 2022 is obvious.
In May, NDX dropped 0.64% on FOMC day and at the last meeting on June 14 NDX gained 0.70%. Those are the two lowest reactions to the FOMC announcement since January 2022. Another interesting data point (not on the chart) is the average price change in 2023 for NDX is +/-0.99%. Not only has the recent NDX reaction to FOMC announcements been lower than most recent meetings, but it also is lower than the average NDX day in 2023.
Another data point we look at around major economic announcements is how the one-day NDX at-the-money (ATM) straddle was priced relative to the subsequent market move. The graphic below shows the one-day ATM straddle pricing going into the FOMC day and upon the close the following day.
The ATM straddle overpriced the move for the last three FOMC announcements and a real disaster for straddle sellers has not occurred since November 2022. Note there were several bigger than straddle moves over the course of 2022.
We have the numbers that are needed to be informed around trading NDX options on FOMC day. The moves have been less volatile lately and the straddle pricing has adjusted accordingly. It all comes down to what the NDX option market expects for an FOMC reaction as to the ultimate trading decision.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Russell Rhoads, PhD, CFA
Russell Rhoads, Phd, CFA is a highly regarded strategist, educator, and consultant – among other things he is perhaps best known as the author of Trading VIX Derivatives, the textbook in the space.
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