TLT & ITB Surge As Inflation Flatlines

TLT & ITB Surge As Inflation Flatlines

The CPI was unchanged in May, the government reported on Wednesday.

sumit
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Senior ETF Analyst
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Reviewed by: etf.com Staff
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Edited by: Ron Day

Stocks and bonds surged, with the S&P 500 hitting another record, after the government reported that consumer prices didn’t increase last month.

The S&P 500 surged as much as 1.3% to 5,446 after the Bureau of Labor Statistics said that the consumer price index was unchanged in May. Economists were expecting the CPI to increase by 0.1%.

Meanwhile, the BLS said that the core CPI—which excludes food and energy—grew by less than 0.2%, its smallest increase since 2021. 

On a year-over-year basis, the headline and core CPI were up by 3.3% and 3.4%, respectively

The stock market rallied after the release of the consumer price data as investors reasoned that the Fed was more likely to cut rates this year with inflation on the downswing. 

The central bank will announce its latest monetary policy decision later today and is expected to hold rates steady. However, following the latest inflation readings, market-based indicators suggest that the Fed could slash its federal funds rate twice this year, in September and December.

Biggest ETF Movers

Some of the biggest gainers on Wednesday included home construction ETFs, like the SPDR S&P Homebuilders ETF (XHB) and the iShares US Home Construction ETF (ITB), which gained 4.4% and 5%, respectively, midday Wednesday.

Other interest-rate-sensitive segments of the market, like REITs, also rallied. The Vanguard Real Estate Index Fund ETF (VNQ) was last trading up by 2.3%.

Bond ETFs, whose prices move in the opposite direction as interest rates, rose as well.

The popular iShares 20+ Year Treasury Bond ETF (TLT) surged 1.6% on Wednesday. The broader iShares Core U.S. Aggregate Bond ETF (AGG) was trading higher by 0.9%.

Fight Not Over

While the May CPI report was encouraging, Fed Chair Jerome Powell and his colleagues are likely to stress that the fight against inflation isn’t over.

Inflation came in hotter than expected during the first three months of the year, so central bankers may need to see several months of more benign readings before they feel comfortable lowering interest rates.

Still, the May data gave investors little reason to fear the trajectory of consumer prices. The month-over-month increase in core CPI of 0.16% is equal to an annualized rate of less than 2%— which is below the Fed’s inflation target—and the internals of the report were encouraging as well.

Core prices excluding housing dropped 0.4% from April to May, while core services excluding housing fell by 0.6%.

The next inflation data point that investors will be watching is the May producer price index, scheduled to be released on Thursday, followed by the PCE on June 28th.  

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.