Week of Mar 16 2025 (Roll)

Inflation data painted a contradictory picture: CPI and PPI came in softer than expected, yet the University of Michigan 5-10 year inflation expectations surged to 3.9%—the highest since 1993, well above the 3.3% that spurred aggressive Fed rate hikes in 2022. This disconnect between moderating inflation and soaring expectations, reflected in the 10-year Treasury yield rising to 4.35% despite equity weakness, complicates the Federal Reserve’s stance ahead of next week’s pivotal FOMC meeting. Markets now price in 62 basis points for 2025, down from expected cuts, balancing tariff-driven inflation risks against slowing economic momentum.

A defining trait of this correction has been Charlie McElligott’s "Beta Bifurcation"—an unusual dispersion where low beta stocks rallied while high beta names sold off sharply, yielding a counterintuitive "Spot Down, Vol Down" dynamic. Unlike typical risk-off periods with near-1.0 correlation, pairwise correlation stayed low, muting volatility despite the equity decline. Morgan Stanley urges rotation into Financials and domestic manufacturers over chasing prior market leaders.

Positioning data reflects significant de-risking without clear capitulation. CTAs cut exposure to October 2023 levels (JPMorgan), while 464 discrete outflows—the heaviest selling since June 2022 (RBC’s Edwards)—coincide with hedge fund selling potentially easing (Goldman Sachs) and "cleaner" systematic deleveraging (McElligott). Historical analysis of such outflows shows consistent S&P 500 gains at 9, 12, and 24 months post-2009, hinting at upside post-purge. Market signals suggest a tactical bounce: corporate insiders are buying (per the Insider Velocity indicator), notably in S&P 500 and tech stocks, and SentimentTrader’s Composite Washout Model triggered a bullish divergence, historically tied to short-term rallies, despite heavy selling (e.g., Nasdaq’s worst loss in a year).

Defensive rotation is evident as consumer staples surge over discretionary—half of tech and discretionary stocks now in bear markets—reinforcing a risk-off stance. This, with heavy selling and insider buying, suggests a near-term rally, though medium-term risks linger amid tech weakness and ongoing policy uncertainty. International stocks and gold exhibit relative strength, with the Gold/SPX ratio above its 200-week EMA, a historical precursor to gold outperformance.

Left-tail scenarios focus on an economic slowdown amid elevated inflation expectations, driven by tariff-related fiscal contraction, risking stagflation where neither bonds nor stocks shield portfolios—a bind limiting Fed flexibility. Right-tail opportunities hinge on policy uncertainty easing or resilient data sparking a rally, with Jared Woodard (BofA) positing a longer-term "global handoff from big government to the free market" that could yield productivity gains outweighing near-term costs.

These risks and opportunities await clarity from Week 12’s packed central bank slate. Monday features US Retail Sales, followed by Tuesday’s Housing Starts and Building Permits. Wednesday hosts Japan, US, and Brazil decisions, with the FOMC meeting and Powell’s press conference as the centerpiece—its dot plot and projections key to gauging inflation-growth tradeoffs post-tariffs. Thursday includes UK, Switzerland, and Sweden decisions plus US Existing Home Sales. These meetings, the first policy responses since tariffs took effect, may clarify the global monetary trajectory.