Bonds are outperforming stocks as investors move to safer assets. TLT shorts remain steady, while IEF shorts rise, signaling a shift in strategy. SPY short interest is growing, showing bearish sentiment. The Fed is expected to hold rates, with no CPI surprises, though inflation remains sticky. Tariffs could push prices higher in ways rate hikes cannot control, adding more uncertainty to the market.

The yield curve has shifted down significantly in the past month.

Bonds have outperformed stocks recently, potentially due to a flight to quality or risk-off sentiment, as stocks had led before. The US currency fell as foreign investors sold stock.

The TLT short position has remained steady, despite the bond rally. Meanwhile, the short position in the IEF (intermediate bonds) has increased, reflecting a reversal strategy.

Sentiment is evident as short interest in the SPY rises, indicating both long and short positions are being sold in a momentum strategy. The previous "buy on weakness" strategy that supported the market is now absent.

TLT Short Position

IEF Short Position

CPI Outlook

The CME Fed tool shows a 97% probability of no change in the short rate, signaling that the market does not anticipate a CPI surprise.

The consensus is that inflation likely decreased in February, but price pressures remain sticky overall.

Prices likely rose for insurance, food, and new and used cars last month.

Inflation moderated slightly during the month, but price pressures are still higher than the Fed would prefer.

Tariffs:

Tariffs could drive prices up, but for reasons distinct from historical trends. According to several industry economists the Fed will likely need to consider tariffs as part of its overall analysis in terms of predicting and managing inflation.

For example, raising interest rates might not curb demand-driven inflation if it is caused by regulatory factors.

The CPI forecast could change, depending on what tariffs are present in the market, during the run-up analysis to the announcement.

Markets are reacting to shifting sentiment—bonds are leading while stocks struggle, and momentum shorting continues to gain traction. With the Fed expected to hold rates steady and inflationary pressures persisting, investors should be cautious about assuming past market behaviors will hold. Tariff policies may introduce additional inflation risks that could shift CPI expectations in the months ahead.

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