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VAR Shock is Not the Base Case but Hedging that Outcome Makes Sense While FCI Remain Very Easy Relative to Core Inflation

Published on June 9, 2026

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Dennis DeBusschere

Kevin Brocks

Sophia Wang

DAILY STRATEGY: The financial conditions tightener over the past two days was a 96^th percentile move that reduced the impetus to GDP over the next four quarters by ~9bps. That’s a large move, but the risk of a VAR shock/broad derisking is still present because financial conditions are still historically easy relative to core inflation (93^rd percentile).

To be clear, the modal outcome is not a broad derisking. Inflation is not high enough to warrant a VAR shock/broad derisking unless the Strait of Hormuz remains closed (SOH). The tariff impact will fade in 2H26 and if the SOH supply shock fades, upside inflation tail risk will be reduced. The labor market does not appear to be inflationary (HERE), which is good for the forward inflation outlook (HERE). We are long Retail, Banks, and Airlines for a “catch-up”. We like Price Momentum longer term (HERE). The SOH remains a volatile situation though.

The practical implication of the gap between FCI and inflation, and the SOH event risk is that hedging is still important. We have been focused on hedging Momentum and rates, because Momentum would lead to the downside in a VAR shock (definitionally) and rates would increase if the supply shock or other inflationary pressures increased. Friday is a good one-day example.

We recommended IWM puts because small caps are being driven by AI, and TLT calls. Those have worked. If you’re looking to hedge from here, Jeff Jacobson, 22V Derivatives specialist, likes the following structures…

Buy TLT July 17th 84/80 put spread for $0.65 (TLT 84.62 ref)

Buy IWM July 17th 277/252 put spread for ~ $4.10 (IWM 285.25 ref)

FYI, consensus estimates for core CPI tomorrow are 0.22% (translating to core PCE ~0.25%), which would not be hawkish relative to recent trends. In that sense, an in-line core CPI may be good news. It does represent an event risk to consider hedging ahead of though.

Charts…

Financial conditions are easy relative to inflation. The gap doesn’t have to close with inflation on its current glide path, assuming a resolution of supply shocks. The risks to that view, mostly around the SOH, warrant hedging against financial conditions tightening.

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AI-generated content may be incorrect.

Jeff Jacobson favors the following two trades to hedge against rates higher and Momentum lower from here.

Small caps are a good liquid option to hedge Momentum because they are driven by AI buildout industry groups.

After yesterday’s rebound, the Momentum drawdown is now only a 50^th percentile move.

Low Vol is up +4.9% (was +7.9% Frida). The two day move is still extreme (97^th percentile).

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AI-generated content may be incorrect.

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