Market Analysis

CPI Expectations: Softer Inflation Could Fuel an SPY Squeeze

August 12, 2026

As I have mentioned previously, SPY skew is near its lowest levels in some time. At the same time, nearly 35% of S&P 500 members now have inverted three-month call skew—the highest share on record.

Normally, out-of-the-money calls trade at lower implied volatility than near-the-money options. Inverted call skew means that relationship has flipped, with investors paying a higher volatility premium for three-month upside calls.

Share of S&P 500 members with inverted three-month call skew reaches 34%, versus a 10-year average of 6.7%.

I use the three-month measure because it filters out much of the 0DTE speculation and short-term noise. It gives us a better picture of what investors are paying to protect against the risk of missing a continued rally over a more meaningful period.

Basically, the market is now hedging the risk that equities continue moving higher without them.

If the market rises and these calls move closer to the money, dealers who are short the options may need to buy more stock to remain hedged. That can reinforce the rally and increase the risk of an upside squeeze. It does not guarantee one—the effect still depends on dealers’ net positioning—but the setup is becoming increasingly supportive.

On to the Inflation Report

I think inflation is likely to come in softer than expected, with headline CPI around 0.04% month over month and core around 0.05%, against consensus of roughly 0.1% and 0.2%.

Core is right on the rounding line between 0.0% and 0.1%, while I see a very high probability that inflation falls year over year. Consensus therefore looks more like the ceiling than the base case.

This is not just about energy. Gasoline is helping, but the potential surprise is concentrated in core inflation again.

Used-car prices are rolling over, new vehicles and other core goods are weakening, shelter inflation continues to grind lower and there is very little evidence of renewed acceleration across services. World Cup-related distortions may also be weighing on travel and accommodation prices, while tariff refunds could be creating a disinflationary payback across import-heavy goods that the market is still largely ignoring.

Yesterday’s NFIB survey supports the same view. Small-business price plans fell to 27.8 from 31.4, while the share of businesses identifying inflation as their single most important problem dropped to 14.0 from 21.1.

US small-business optimism rises to an almost one-year high as hiring and capital expenditure plans improve.

At the same time, optimism and hiring intentions improved. That is close to a Goldilocks combination: activity is holding up while pricing pressure is coming down.

Federal Reserve sentiment turns more hawkish in 2026 while one-year inflation swap pricing falls toward 2%.

The chart shows the wider disconnect. Fed communication remains close to its most hawkish levels of the cycle, while underlying inflation pressure continues to move lower. A zero-handle core print, particularly after the weak payrolls report, would make the remaining hiking bias increasingly difficult to sustain.

I am not saying the Fed suddenly turns dovish. However, the front end would probably have to start repricing away from further hikes.

Lower inflation would also sit more comfortably alongside Treasury’s increased focus on short-term issuance, although I would not treat the issuance mix itself as evidence that Treasury expects a softer CPI print.

Positioning Could Add Fuel to the Move

On top of this, President Trump is considering a capital gains tax cut ahead of the midterm elections, while both asset managers and leveraged funds are sitting near the bottom of their one-year Nasdaq positioning ranges.

If inflation comes in softer than expected, there is plenty of room for positioning to add fuel to the upside.

Nasdaq positioning shows asset managers at the 13th percentile and leveraged money at the 2nd percentile of their one-year ranges.
Nasdaq positioning shows asset managers at the 13th percentile and leveraged money at the 2nd percentile of their one-year ranges.

QQQ Positioning

For QQQ, the first major resistance zone is between $720 and $725. A clean break above it should help momentum accelerate towards a test of $735.

 

While QQQ remains above $712, market-maker exposure should provide support through dip buying. Overall options positioning is fairly neutral, with $700 representing the main downside reference if CPI comes in hot.

QQQ market-maker exposure and options positioning with spot at $718.45, a $712.56 volatility trigger and $700 key level.

SPY Positioning

SPY positioning going into CPI is bullish, with $775 remaining the main resistance level.

SPY market-maker exposure and options positioning with spot at $770.56, a $775 key level and $767.34 volatility trigger.

If CPI comes in hotter than expected, $750 is the principal downside positioning level I am watching.

VIX Positioning

VIX positioning and exposure remain deeply negative. Some tail-risk hedges are being built around the $35 strike, but that is not unusual and does not currently change the broader setup.

VIX options volume by strike shows the largest concentration at $35 and a call-to-put ratio of 4.06.

My Positioning Before CPI

I will be trimming some of my DRAM and QQQ exposure before the print. My base case remains a softer CPI report and a potential squeeze higher, but a binary event should never be confused with certainty.

Reducing some exposure ahead of the release is simply good risk management. It allows me to keep meaningful upside participation without carrying unnecessary event risk if the data surprises in the opposite direction.

This article is for educational purposes only and is not financial advice.