The real question: Regime shift or just another short-term adjustment

The market is in a full-blown state of flux, with the latest shake-up in Treasuries amplifying the uncertainty. Yields have cratered across the curve, but not because inflation is cooling—real yields are leading the move lower, signalling a flight to safety and growing fears of a broader economic slowdown. But while bonds rally, equities remain fragile, with Big Tech—Tesla front and center—taking another bruising. Consumer sentiment is looking increasingly shaky, with the latest Conference Board data showing inflation expectations ticking higher. Nvidia's earnings were supposed to be the stabilizing force, but the reaction has been tepid at best.

The real question now is whether this marks a true regime shift or just another short-term adjustment. Are we at an inflection point where economic momentum is breaking down while inflation remains stubbornly high? The lack of concrete fiscal measures from Trump’s administration—no sweeping tax cuts, no aggressive deregulation—has left markets second-guessing the growth outlook. Investors who were banking on a flood of pro-business policies are now recalibrating their expectations, and the soft-landing narrative is looking less convincing by the day.

At this stage, inflation and unemployment are the key indicators that will dictate where we go next. The odds still lean toward inflation persisting rather than cooling meaningfully, while the labour market remains too tight to give the Fed the green light for aggressive easing. The dreaded stagflation scenario—where inflation stays elevated while unemployment rises—is a real possibility. In my view, the probabilities break down as follows: 65/35 in favour of inflation holding firm versus retreating, with a roughly even split between a tight labour market and rising joblessness.

Housing remains a critical stress test. A steep drop in home sales has reinforced the market’s bearish tilt—existing home sales cratered 30% from December to January, while new housing starts fell 10%. Permits have held steady, but inventory levels continue to rise, adding to pressure on builders. Despite all this, the housing sector isn’t in a dramatically worse position than it was in October. Mortgage rates have eased slightly, but the damage from previous spikes is still reverberating, and homebuilder stocks have been in a steady downtrend for five straight months.

The real concern is that the usual spring rebound might not materialize. Homebuilders are sitting on excess supply, and their initial optimism for a seasonal demand pickup is quickly being replaced by caution. Add in the structural headwinds—labor shortages due to immigration restrictions, rising material costs thanks to impending tariffs on Canadian lumber—and you have a market that could struggle to find its footing. Either demand remains weak, or builders take a hit on margins. Neither scenario bodes well for broader economic momentum.

The overarching market narrative is getting murkier. We’ve got a rare combination of falling yields, sticky inflation, and a housing market facing fresh headwinds. Meanwhile, the dollar is firming on trade policy anxiety, and with the March 4 tariff deadline looming over Canada and Mexico, the next wave of volatility is right around the corner. April’s broader tariff rollout will only compound the uncertainty.

Traders should exercise caution. The market is caught between conflicting forces—slowing growth, persistent inflation, and a Fed that won’t budge unless the data compels it to. Presently, sentiment is fragile, and pursuing significant moves in either direction is risky. Remaining agile and closely monitoring the next key data points is crucial. Once the market fully adjusts to this shift, the change won’t be gradual—it will be sudden and severe.