ETFs
CPI Report and Dot Plot Looming on Rate-Sensitive ETFs
Inflation
After last week’s hotter-than-expected jobs report, anticipation is growing for this week’s Consumer Price Index (CPI) reading, expected before the market opens Wednesday, as well as well as for the Fed’s rate policy decision and projections that will follow this afternoon.
What investors can expect and how it will impact rate-sensitive ETFs, such as Bond Market Proxy iShares 20+ Year Treasury Bond ETF (TLT) and the growth stock proxy Invesco QQQ Trust (QQQ)?
While investors expect only a slight decline in inflation, the biggest potential market move this week will likely be Fed Chair Jerome Powell’s statement following the CPI report , as well as its dot plot forecasting possible rate cuts in 2024 and beyond.
CPI Report and Point Plot Expectations
The CPI report is expected to show a slight slowdown for May, with an expected increase of 0.1% from the previous month’s headline figure, while still increasing 3.4% year-on-year. unchanged compared to April. While slowing month-over-month growth may provide some relief for investors, a 3.4% annual increase is still well above the Fed’s 2% target.
The Fed’s dot plot, formally known as the Summary of Economic Projections, is expected to show fewer interest rate cuts than policymakers predicted three months ago, boosting investor expectations in in favor of an increase in long-term rates.
The dot plot shows each FOMC member’s forecast for economic factors such as GDP growth, unemployment, and inflation over the coming years and longer term. In other words, the dot plot is a visual representation of how each member expects the federal funds rate to be set over the long term. It is essentially a graph with “dots” representing individual projections of the policy interest rate.
TLT, volatility of rate-sensitive ETFs
As recently as December, investors were expecting at least three rate cuts in 2024, as predicted in the previous dot plot. From its lowest price in October through the end of 2023, investors had increased the price of the TLT ETF by more than 20%, as the rate-sensitive ETF’s prices move in the opposite direction to the returns of the Treasure.
After three consecutive months of higher-than-expected inflation reports in 2024, the TLT price was corrected 6% lower this year, at the end of last week’s trading session.
Growth stocks, which can also benefit from a falling interest rate environment, have also seen similar volatility in recent months. The QQQ ETF also jumped nearly 20% from October to December. While the tech-heavy ETF is still up 13% year to date, thanks to big gains in top stocks like Nvidia, the fund fell 5% in April due to inflation fears.
The story continues
This volatility is likely to continue until investors can get a clearer picture of inflation, which could come from this week’s CPI and FOMC dot chart.
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