Nomura: A large number of panic put options have appeared in the US stock market, and concerns about "stagflation" are beginning to spread

U.S. economic data unexpectedly weakens, combined with concerns about potential policies from the Trump administration, triggering market anxiety over the prospect of "stagflation" in the U.S. economy.

Charlie McElligott, a senior strategist at Nomura Securities, pointed out in a recent report that U.S. economic data unexpectedly weakens, combined with concerns about potential policies from the Trump administration, triggering market anxiety over the prospect of "stagflation" in the U.S. economy.

McElligott noted that the skewness of U.S. stock index options and the skewness of put options have approached "extreme" levels seen in the past year, reflecting investors' pessimistic sentiment regarding economic growth prospects.

The market increasingly believes that the "small wounds" inflicted by various policies on the economy may evolve into a full-blown "growth panic." Investors are reassessing the Federal Reserve's policy path, with expectations for larger rate cuts heating up. In particular, the probability of an "uneven landing" (defined as 2-4 rate cuts by December 2025) has surged from 7% last week to 50%.

Amid "stagflation" concerns, U.S. stock put options surge, volatility spikes

The preliminary U.S. February Markit Services PMI released last Friday unexpectedly shrank to a two-year low, triggering risk aversion in the market. Among them, the "employment" sub-index plummeted by 9.3 percentage points to 49.3, falling into contraction territory and reversing the improvement trend of the previous two months.

McElligott pointed out that the labor market has been key to the consumption-driven economic growth in the U.S. post-pandemic. The market is extremely sensitive to any signs of weakness in the labor market, viewing them as justification for "economic repricing." As seen in August 2024, the unemployment rate and non-farm payroll data significantly underperformed expectations, shaking the market's consensus on a "soft landing," leading to a spike in "volatility of volatility" (Vol of Vol).

In addition to signs of slowing economic growth, the rise in inflation expectations has also intensified market concerns about "stagflation." The University of Michigan Consumer Sentiment Index, Current Conditions Index, and Expectations Index all fell short of expectations, but short-term and long-term inflation expectations surged.

On March 14, the U.S. government may face the risk of a shutdown, adding uncertainty to the market. Politico reported that unless a significant breakthrough occurs in the coming days, Congress will once again face a government funding crisis.

Meanwhile, the market is beginning to realize that the policy mix of the Trump administration and the current economic environment may impose a more severe drag on economic growth than initially expected. In particular, efforts to reduce the budget deficit by cutting government spending and tariff policies have created significant uncertainty for the economy, which could ultimately impact both nominal and real GDP McElligott emphasized that as of last Friday's close, the skew of U.S. stock index options and the skew of put options have approached "extreme" levels not seen in the past year.

• A large number of clients are buying "crash put options" on the S&P 500 index (with strike prices 95% below the current price);
• "Volatility of volatility" has seen a significant increase, reflecting the market's expectation of a wider distribution of future outcomes.

The market increasingly believes that the "small wounds" inflicted on the economy by various policies could evolve into a full-blown "growth panic."

On Friday, the probabilities of "no landing" (the Federal Reserve not cutting rates and even raising them) and "soft landing" (the Federal Reserve cutting rates 0-2 times) significantly decreased.

In contrast, the market's expectations for larger rate cuts have surged, especially the probability of "uneven landing" (defined as cutting rates 2-4 times by December 2025) skyrocketing from 7% last week to 50%.