IVs are mean reverting by nature. So, we should see sustained high IVs in the next few weeks after last week’s IV explosion. With this assumption in place, we have defined five key lines in the sand for identifying the hard landing scenario for US economy. There could be many more but for us, these are what we see as supporting the 3 pillars of Fed’s mandate: macroeconomic stability, core PCE around 2% & full employment. If either of the five above breaks through the levels mentioned, we can easily assume that Fed has missed out on one of it’s mandate & will do a course correction immediately. Risk management then will become paramount for Fed in an election year so nothing can be ruled out if any of these five indicators cross their red lines respectively.
