The final CPI report before the election is due Thursday, and bond market short positions suggest bearishness across key sectors, reflecting inflation and interest rate concerns.

The final Consumer Price Index (CPI) release before the election will occur this Thursday, which is significant given the economy's role as a key issue in the campaign.

The CPI for the last two months has been 0.2%, and consensus forecasts a decrease to 0.1% for this month on a month-over-month basis. Year-over-year inflation may reach 2.3%, the lowest level since 2001, marking the sixth consecutive decline.

The next Federal Open Market Committee (FOMC) meeting is scheduled for November 7, following the election.

The bearish sentiment surrounding bonds prior to the last published economic data has materialized.

All these ETFs have experienced declines TLT (Long-Term), IEF (Intermediate), and IEI (Short-Term). and interest rates have risen since September 17.

The short position in TLT (long terms) is currently higher, indicating bearish sentiment; the short position in IEF (intermediate) remains flat, suggesting neutrality; while the short position in IEI (short term) has significantly increased, reflecting extreme bearishness and much higher rates.

TLT

IEF

IEI

The yield curve is currently downward sloping, featuring a valley in the middle. If bond movements align with the indicated short positions, the curve will rise at both ends while remaining flat in the center, resulting in a higher curve with a more pronounced valley.

In contrast to previous trends, XLU (Utilities) is behaving more like equities than bonds, showing recent increases alongside a slight rise in short positions.

Different sectors exhibit varying responses to inflation:

Sectors that typically perform well during inflation: Energy, Healthcare, Finance, Consumer Staples, Real Estate, and Commodities.

Sectors that perform poorly during inflation: Consumer Discretionary, Materials, and Industrials.

Interestingly, the sectors that tend to thrive during inflation have seen decreases in their short positions, indicating a market expectation of bullish sentiment or a forecast of higher inflation.

Those that do poorly in inflation have higher short positions, indicating bearishness or higher inflation.

At the same time those that do poorly during inflation have flat short positions

This all speaks to higher rates than expected and higher inflation and may speak to a 25bps cut as opposed to a 50bps cut.

Bond market movements and sector trends highlight rising interest rates and inflation. The upcoming CPI report and its impact on short positions may shape future economic policy.

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