Investor Anxiety Grows As VIX Index Records Dramatic Increase Amid Fed Rate Hike Concerns: Why Is Volatility Spiking Thursday?

The CBOE Volatility (VIX) Index, commonly known as the “fear index,” surged over 20% on Thursday, reflecting the prevailing market volatility across major U.S. stock indices.

With a daily change of 20%, the VIX is on track for its best session of 2023, topping the spike seen on March 8, when it soared 18.3% following the banking failures of Silicon Valley Bank and Signature Capital.

Chart: CBOE Volatility Index On Track For The Best 2023 Session
(1-day % change in VIX)

Why is Stock Market Volatility Spiking on Thursday?

The spike in the VIX was fueled by mounting concerns that the Federal Reserve may raise interest rates again in 2023, potentially with two more hikes by year-end, as indicated by the June dot plot.

Wednesday’s minutes from the latest June FOMC Meeting revealed an unusual dissent within the board, with a minority of members preferring a rate hike in June rather than keeping rates unchanged.

The minutes also indicated a strong consensus to implement further rate increases, as reflected in the macroeconomic projections, with two hikes being the median preference among Fed members.

Strong Economic Data Backed by Hawkish Fed Remarks

On Thursday, better-than-expected economic data further fueled market expectations of rate hikes by the Federal Reserve.

The ADP National Employment Report revealed an impressive 497,000 new payrolls in June, a remarkable jump from May’s 278,000 and well above the forecast of 220,000.

Shortly after, the Institute for Supply Management (ISM) reported a surge in the Services PMI to 53.9 in June, up from 50.3 in May and beating expectations of 51. This marks the sixth consecutive expansion reading for the private services sector.

Adding fuel to the fire, Lorie K. Logan, president and CEO of the Federal Reserve Bank of Dallas and a Federal Committee Member this year, stated that “more restrictive policy and rate hikes are needed for the FOMC to reach goals.” She also expressed concern about the speed at which inflation will cool down and revealed her preference for a June rate hike.

Traders Now Fear the Fed Will Hike Twice

All these events have led traders to anticipate an increased likelihood of Fed rate hikes.

The probability of a 25 basis points hike in July has now risen to 95%, up from 90% yesterday.

More worrisome is the probability of a consecutive hike in September, which has increased from yesterday’s 18% to 28.5%, and the likelihood of a second rate hike in November now stands at over 40%, according to CME Group Fed Watch tool.

CME Group Fedwatch: FOMC Meeting Probabilities as of July 6

MEETING DATE	450-475	475-500	500-525	525-550	550-575	575-600
26/07/2023			5,1%	94,9%
20/09/2023			3,6%	67,9%	28,5%
01/11/2023			2,5%	49,0%	40,1%	8,4%
13/12/2023		0,2%	6,7%	48,2%	37,3%	7,6%
31/01/2024		1,3%	13,6%	46,4%	32,4%	6,4%
20/03/2024	0,4%	4,7%	22,7%	42,4%	25,1%	4,6%

ETFs Tracking The VIX Index

There are several ETFs available that track the VIX index. Here are a few examples:

1. ProShares VIX Short-Term Futures ETF VIXY
2. iPath Series B S&P 500 VIX Short-Term Futures ETN VXX
3. VelocityShares Daily 2x VIX Short-Term ETN TVIX
4. ProShares Ultra VIX Short-Term Futures ETF UVXY

ProShares VIX Mid-Term Futures ETF VIXM

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