During her post-FOMC meeting press conference on Wednesday, Fed Chair Janet Yellen characterised the recent inflation data as “noisy.”
Morgan Stanley’s Matthew Hornbach said that response was the “biggest surprise of the FOMC press conference.”
Hornbach attributed “the lion’s share of the market reaction” to her characterization.
In case you missed it, stock markets surged and volatility (as measured by the CBOE Volatility Index) collapsed.
The Thing About Economic Data Reports
Traders and investors around the world pay close attention to quarterly, monthly, and weekly economic reports as they make their next trades.
One good or bad report has the power to cause volatility to spike in the stock, bond, commodity, and currency markets.
More recently, the focus has been over whether the data would alter monetary policy decisions.
Recent inflation data have signaled that inflation is accelerating, an issue that was believed to encourage more hawkishness at the Fed.
Dismissing It With One Word
But Yellen simultaneously dodged the issue altogether and crushed the market-moving power of the high-frequency economic data traders love so much.
“The Fed’s characterization of recent inflation readings as “noisy” and the preponderance of evidence to the contrary (see Exhibit 1) leave us feeling as if the Fed is likely to dismiss most economic data deviations from slower-moving trend processes,” said Hornbach. “Under the “dismissive” framework, implied market volatility should increase less for a given economic surprise than under our previous framework — a “reactive” framework based on the idea that the Fed would be more data dependent. As a result, we turn neutral on implied volatility.”
Wall Street is already bored to death by the low market volatility. If Hornbach is right, then this period of low volatility could be here for a while longer.