New Inflation Figures Spell Trouble for Equity ETFs

Inflation remains a pain point for American consumers, and its impact on markets could spell more trouble for equity-focused ETFs.

Headline inflation came in at 8.3%, dropping a meager 0.2% from July, and falling short of the expected 8.1%, according to the latest data from the Bureau of Labor Statistics. But all eyes turned to the so-called core CPI, which strips out more volatile categories like food and energy—it jumped 0.6% from July and 6.3% compared with this time last year.  

“Whether it’s that month-over-month number, whether it’s that core CPI number, what we got is not that good,” said Mark Hamrick, senior economic analyst for Bankrate.com. “If there’s one lesson from this, it’s that inflation is higher and more sustainable than just about anyone expected. It could well be more difficult to contain it than we might have earlier believed.”  

Bad News for Markets 

News of the lackluster figures has forced markets to plummet, with the S&P dropping 4.4% and the Nasdaq composite falling 5.1% at the end of the trading day, ending on the worst note for stocks since June 2020.  

Equity-focused ETFs could be in for another week of dismal flows, following two consecutive weeks of net outflows for the industry. In the week ending Sept. 9, equity-focused funds reported nearly $3.7 billion in outflows. The SPDR S&P 500 ETF Trust (SPY) was down 4.2% at the end of the trading day, while the Invesco QQQ Trust (QQQ) slipped 5.4%.  

“All in all, we believe that inflation will remain above 5% for the rest of the year. However, we will see headline inflation move closer to core inflation, the measure that excludes the impact of energy and food prices,” said Gargi Chaudhuri, head of iShares investment strategy in the Americas at BlackRock Inc., in a note. “This morning, core CPI printed at 6.3%—above July’s 5.9%, with strength coming across categories such as shelter, medical services and transportation services.” 

The one expectation that will likely be met next Wednesday: a third consecutive 75 basis point rate hike announced by the Federal Reserve, according to economists and analysts. What remains in question is the target rate the central bank foresees will bring an end to the rate-hike cycle.  

“We certainly weren’t surprised by it,” said Brian Mulberry, director at Zacks Investment Management, referring to the less-than-ideal inflation numbers. “What you’re seeing reflected in the market is the realization that rates are going to be around for longer… The terminal rate hasn’t been discussed in detail; what you’re seeing is realizing how high those are going to go.”  

Contact Shubham Saharan at [email protected]