Tech, Bond ETFs Rally After CPI Report

Tech stocks rallied and bond yields fell after an in-line reading on U.S. consumer prices bolstered expectations that the Fed’s rate hiking campaign is over.  

On Wednesday, the Bureau of Labor Statistics reported that the consumer price index grew by 0.4% between March and April, as expected.  

The core CPI, which excludes food and energy prices, grew by 0.4% as well, matching expectations.  

Following the release of the data, probabilities based on fed funds futures prices pointed to a strong likelihood of the Fed doing nothing at its June meeting. There is currently an 87% chance that the U.S. central bank holds rates steady when it meets on June 14, according to futures pricing. 

Those expectations pushed yields on Treasury securities lower. The 10-year Treasury note yield dipped 6 basis points to 3.46%, while the two-year note yield fell by 7 basis points to 3.95%. 

The iShares 7-10 Year Treasury Bond ETF (IEF) and the iShares 1-3 Year Treasury Bond ETF (SHY) gained 0.6% and 0.2%, respectively (bond prices and yields move inversely). 

Falling bond yields had a knock-on effect on tech stocks. The Vanguard Information Technology ETF (VGT) jumped 0.8% to trade around a nine-month high. Lower interest rates are seen as positive for growthy tech stocks, as it makes their future profits more valuable. 

Encouraging Signs  

Though certainly the “news of the day,” the release of Wednesday’s CPI report wasn’t the big event that other inflation reports of the past year have been.  

After accelerating throughout 2022, growth in consumer prices has reached a steady state between 4% and 5% on an annualized basis. 

That’s still far too high for the Fed’s liking, but in a region that gives the Fed cover to pause its hikes and wait to see whether the lagged effects of 500 basis points of monetary policy tightening in a year can do the rest of the job in bringing inflation back down to the central bank’s 2% target. 

In that regard, some of the internals of this latest CPI report were encouraging. So-called supercore CPI, which measures prices for core services excluding housing, rose by only 0.1% from March to April, the smallest monthly increase since July 2022.  

Some Fed officials have been closely monitoring these finer measures of inflation to get a better sense of underlying price pressures.  

Those officials are likely encouraged by what they saw in April’s CPI report.  

Contact Sumit Roy @[email protected]