By Saqib Iqbal Ahmed
NEW YORK (Reuters) - Traders in the U.S. equity options market have grown skittish ahead of Tuesday's release of inflation data that could sway the Federal Reserve's monetary policy trajectory.
Options on the S&P 500-tracking SPDR S&P 500 Trust (SGX:SPY) ETF were primed for a 1% swing in the fund's shares in either direction by the end of trading on Tuesday. That's larger than the 0.7% move traders had been pricing for stocks ahead of the January inflation report, according to a Cantor Fitzgerald analysis.
Stronger-than-expected consumer price and employment data have whittled away at investors' expectations for how much the Fed will cut interest rates this year. More evidence of sticky inflation could push investors to further pare their bets on Fed easing, potentially weighing on a rally that has seen the S&P 500 rise 7% this year.
U.S. consumer prices rose more than expected in January, amid a surge in the cost of rental housing, prompting a 1.4% drop for the benchmark stock index on Feb. 13, when the data was released.
After last month's stronger-than-expected report, "there is certainly more trepidation regarding tomorrow's data and this will add to the nervousness of the options market today," said Matthew Tym, head of equity derivatives trading at Cantor Fitzgerald.
Investors are now pricing in 94 basis points of rate cuts this year, compared to around 150 basis points they had priced in early January, according to futures tied to the fed funds. So far, however, a resilient economy, better-than-expected earnings and confidence that the Fed will nevertheless cut rates several times before the year is up have supported stocks.
According to a Reuters survey of economists, the CPI likely increased 0.4% in February, with the annual increase in prices at 3.1%. The core CPI is also forecast advancing 0.3%, with the year-on-year increase slowing to 3.7% from 3.9% in January.
The S&P 500 index was down 0.16% Monday afternoon and the Cboe Volatility Index - an options-based gauge of investors' expectation for near-term stock market gyrations perked up 0.46 point to 15.20, a near three-week high.