Stock ETFs Spike as Inflation Eases

Stocks' biggest rally in more than two years boosted equity exchange-traded funds, as inflation easing last month from highs not seen in decades raised hopes the Federal Reserve will slow the pace of interest rate hikes.  

The Labor Department’s consumer price index rose 7.7% in October, down from 8.2% in September. The figure was less than Bloomberg-polled analysts’ estimates of 7.9%. Meanwhile, core price inflation, which strips out volatile food and energy prices, advanced 0.3% to 6.3%, pulling back from a 40-year high. 

"[It’s] hard to believe that a 7.7% year-over-year inflation rate is reason for celebration, but the 0.3% monthly change in core CPI reduces pressure on the Fed to raise rates another 0.75% at their next meeting,” said Bryce Doty, senior portfolio manager at Sit Investment Associates, in a statement to ETF.com.  

Beaten-down stocks soared: The S&P 500 climbed 5.5%, while the Nasdaq jumped 7.3%, its best gain since April 2020. The SPDR S&P 500 ETF Trust (SPY) and the Invesco QQQ Trust (QQQ) rose alongside their underlying indices. Yields on the benchmark 10-year Treasury bill dropped nearly 22 basis points to 3.83%, while the policy-sensitive two-year note tumbled almost 30 basis points to 4.33%, its steepest decline since 2008.  

Still, the S&P 500 has lost 17% this year and the Nasdaq is down 30%.  

Bond ETFs also rose. The iShares 1-3 Year Treasury Bond ETF (SHY) gained 0.5%, while the iShares 20+ Year Treasury Bond ETF (TLT) added 3.9%. Bond prices rise as yields fall.  

The slower price gains may signal the Fed’s aggressive interest rate hikes are having the desired effect of putting the brakes on the U.S. economy. The central bank implemented four-straight 75 basis- point hikes, and today’s news raises hopes for a smaller hike at the next Fed meeting in December. 

The fed funds rate currently sits between 3.75% and 4%, up from effectively zero at the beginning of the year. 

“In the upcoming months, in light of the cumulative tightening we have achieved, I expect we will slow the pace of our rate hikes as we approach a sufficiently restrictive stance,” Patrick Harker, president of the Federal Reserve Bank of Philadelphia, said in a speech on Wednesday. “At some point next year, I expect we will hold at a restrictive rate for a while to let monetary policy do its work.”  

The likelihood of a 50 basis point hike by the Fed in December, instead of 0.75%, rose to 71.5%, Reuters reported. 

‘Pretty Low Bar’  

Still, today’s rally seems premature to some experts, who point to the need for a consistent downturn in inflation for the Fed to step away from its hawkish tilt. Kevin Flanagan, head of fixed income strategy at WisdomTree, told ETF.com in an interview that the moves in Treasury yields were “probably an overreaction.” 

“If you look at services, they continue to be very sticky. This was really more of an outcome of what you saw on the good side of the ledger,” he said. 

Also, shelter costs, which make up nearly one-third of the CPI index, increased 0.8% last month, the largest uptick since 1990.  

“It’s too early for any victory laps,” Greg McBride, chief financial analyst at Bankrate.com, said in an interview with ETF.com. “We've had reasons for hope in previous months that were only to be dashed in later months or in the ensuing months.”  

“The fact is that one in a row is not a streak,” he noted. “But if we're considering this CPI report improvement, we're setting a pretty low bar.”  

Contact Shubham Saharan at [email protected]