We “should” be looking at the smoldering wreckage of a meaningful equity drawdown right about now.

This week’s US CPI release was about as unequivocal as macro releases can be in the context of our hopelessly ambiguous, post-pandemic, war-era macro regime: US inflation’s not tamed.

True, it’s not raging anymore, but it’s not withering in the face of “restrictive” Fed policy, either. Likely because Fed policy isn’t especially restrictive, or anyway not as restrictive as officials were inclined to believe. Just ask the Fed’s own model.

On Thursday, during remarks for an Economic Club of New York event, Susan Collins acknowledged as much. She also said recent data suggests “less easing of policy this year than previously thought may be warranted.”

Markets now believe the first cut may not come until November. Some doubt it’ll come at all in 2024. And yet, US shares managed to rally a day on from the CPI broadside. What’s the story?

Well, it’s simple really. “There’s no ‘full-tilt’ freakout in, say, spot equities because Fed ‘policy asymmetry’ remains, especially with the rest of the world more open to stimulating for credible ‘growth slowdown’ reasons,” Nomura’s Charlie McElligott wrote Thursday, a few minutes after the ECB effectively confirmed they’ll be cutting rates starting in June.

“Regardless of the three-month core / ‘supercore’ CPI reversals, the most ‘hawkish’ Fed outcome being priced by the market at this juncture remains only a ‘no cut by year-end 2024’ scenario, and that’s being priced at an extremely limited 13%,” he went on.

That’s not to say things aren’t at least getting interesting again. Have a look at the figure below, for example.

That’s basically whether key macro events live up to the billing. Colloquially. Technically speaking, it’s the realized move on the “day of” versus the implied move. As the annotation notes, we’re in the longest streak of “over-realizing” since 2022.

And yet, as McElligott’s colleague Jia Cong Lim noted, unless the market starts to believe the Fed’s actually engaged in some serious soul-searching, vol expansions are opportunities, not hold-your-breath moments.

“Unless there is any hint of the Fed opening up two-sided risks to the rate path, it probably narrows rather than widens the distribution,” the bank’s rates vol team said.

Charlie summed it up as only he can. “Volatility tends to mean revert unless it keeps being fed by large moves, otherwise, especially in this regime of central bank–induced moral hazard and the resumption of broad global easing cycles, volatility is an asset which is to be sold for premium income and yield enhancement,” he wrote.