Markets fluctuate between the “lagged effects of Fed hikes are slowing down consumers, firms, and bank lending,” and “the easing of financial conditions since the December Fed pivot has boosted growth, including January hiring,” see chart below.
The bottom line is that what currently looks like a soft landing is a fragile equilibrium, and there is still more than 50% chance we will end up in either a hard landing scenario where the Fed cuts faster than the market expects or a no landing scenario where the Fed has to raise rates again. It makes sense that rates volatility and swaption volatility are high relative to VIX.
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