CPI Surprises May Drive Stock, Bond ETFs

Bond ETFs hit their lowest levels of the year last week as strong economic data caused traders to pare back their expectations for Fed rate cuts. 

More volatility could be in store this week, with the release of the latest inflation data—the Consumer Price Index for March— on Wednesday.  

The Bureau of Labor Statistics is expected to report that the core consumer price index (which strips out food and energy) increased by 0.3% month-over-month in March. 

That downshift from the 0.4% readings of the prior two months would leave the core CPI 3.7% higher than where it was a year ago—well above the Fed’s 2% inflation target. 

As always in markets, though, the unexpected matters more than the expected. 

If March inflation deviates significantly from what economists have penciled in, then we might see big moves in bond ETFs, and maybe even stock ETFs. 

No Rate Cut?

Last week, Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, floated the idea that the Fed might not have to cut at all this year if inflation stays elevated.  

If March’s CPI reading comes in higher than expected, investors might start to buy into that idea and push yields on Treasuries closer to 5%.  

On the other hand, if March’s CPI numbers are lower than anticipated, the data could feed the narrative that the tick higher in inflation during January and February were mere bumps in the road, and bonds yields could retreat. 

Just as interesting will be the stock market reaction. Year to date, stocks have been invincible, with the S&P 500 rising by double digits. 

Another hot inflation reading could change that, while a cooler-than-expected print could vindicate stock bulls.