CPI Report, Dot Plot Loom Over Rate-Sensitive ETFs

After last week’s hotter-than-expected jobs report, anticipation is building for this week’s Consumer Price Index (CPI) reading, due before the market opens Wednesday, and the Fed’s rate policy decision and projections to follow that afternoon. 

What can investors expect and what will be the impact on rate-sensitive ETFs, such as the bond market proxy iShares 20+ Year Treasury Bond ETF (TLT) and the growth stock proxy Invesco QQQ Trust (QQQ)? 

While investors are expecting only a slight downtick in inflation, the greatest potential for market-moving news this week is likely to be Fed chair Jerome Powell’s statement following the CPI report, as well as its dot plot forecasting potential rate cuts in 2024 and beyond. 

CPI Report and Dot Plot Expectations

The CPI report is expected to show a slight cooling for May, with an expected increase of 0.1% from the previous month’s headline number, while rising by 3.4% year-over-year, unchanged from April. While slower growth month-over-month may provide some relief to investors, a 3.4% annual increase is still far 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 anticipated three months ago, firming investors’ higher-for-longer rate expectations. 

The dot plot outlines individual FOMC member forecasts for economic factors like GDP growth, unemployment and inflation over the next few years and the 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 run. It's essentially a chart with "dots" representing individual projections for the key interest rate. 

TLT, Rate-Sensitive ETF Volatility

As recently as December, investors had expected at least three rate cuts in 2024, which was projected in the previous dot plot. From its price low in October to the end of 2023, investors had bid up the price on the TLT ETF more than 20%, as prices for the rate-sensitive ETF move in the opposite direction of Treasury yields. 

With three consecutive months of hotter-than-expected inflation reports in 2024, TLT’s price corrected downward 6% this year, as of the end of last week’s trading. 

Growth stocks, which can also benefit from a falling interest rate environment, have also seen similar volatility in the past several months. The QQQ ETF also jumped nearly 20% from October through December. While the tech-heavy ETF is still up 13% year-to-date, thanks to big gains on top holdings like Nvidia, the fund dropped 5% in April over inflation worries. 

This volatility is likely to continue until investors can gain a clearer picture of inflation, which may come from this week’s CPI and FOMC dot plot.