The Bureau of Labor Statistics’ long-awaited July Consumer Price Index (CPI) data is scheduled to be released on Thursday at 8:30 a.m., ahead of the opening bell.
This critical economic data will have a significant impact on market expectations for future Fed rate hikes. Therefore, market fluctuations could be anticipated if inflation data surprises expectations.
Currently, there is widespread consensus around the Fed’s decision to keep rates unchanged in September, with a market-based probability standing at 85%, according to CME Group. The likelihood of rates staying unchanged also in the November meeting drops to 71%, still reflecting a substantial majority in this regard.
July CPI Data: What Are Economists Expecting?
Economists anticipate that the annual inflation rate will rise from 3% to 3.3% in July, snapping a streak of 12 consecutive declines. This is mainly due to the so-called base effect, which Benzinga recently explained in an article where we also gathered some analysts’ forecasts.
Core inflation, which excludes energy and food and is closely monitored by the Fed to gauge underlying price pressures in the economy, is expected to remain steady at 4.8% year-over-year in July. Both inflation measures are projected to advance at a monthly rate of 0.2%.
These 5 ETFs Could Heavily React To Inflation Data
Let’s focus on five exchange-traded funds (ETFs) that could experience significant fluctuations if tomorrow’s data differs from economists’ expectations.
- ProShares Trust VIX Short-Term Futures ETF VIXY
The VIXY ETF, designed to mirror the performance of the VIX Short-Term Futures Index, aims to offer investors a means to tap into volatility without engaging in direct options trading.
Higher-than-expected inflation can disrupt a market that largely believes the Fed will keep rates steady in September, thereby potentially increasing market volatility.
The VIXY ETF is down 55% year-to-date, but last week marked its second-best week of the year, surging by 12%.
2. Vanguard Growth ETF VUG
Growth stocks have been on the rise in 2023, with the Vanguard Growth ETF VUG up 35% year-to-date, the move higher has been closely linked to the decline in consumer inflation.
The drop in inflation has eased concerns of excessive hikes by the Federal Reserve, causing the market to start pricing in rate cuts for 2024. This has provided significant relief to stocks highly sensitive to future interest rates.
However, a resurgence in price pressures could potentially slow down or reverse the trajectory that growth stocks have been following thus far.
3. ARK Innovation ETF ARK
Due to its investment focus on innovative and high-growth companies, particularly in sectors like technology, healthcare, and disruptive industries, the ARK Innovation ETF is also highly sensitive to inflation data and thus rate expectations.
Many of Cathie Wood‘s ARKK investments rely on borrowing to support their research, development, and expansion. Funding those activities becomes more expensive when interest rates rise, dampening the growth forecast for these companies.
A reemergence of inflationary pressures could potentially place some downward pressure on the ARK Innovation ETF, which has returned 36% year to date.
4. Fidelity Stocks for Inflation ETF FCPI
This ETF, launched and managed by Fidelity Management & Research Company LLC, invests in stocks that may be better positioned to perform well during inflationary periods.
Its largest holdings include Apple Inc. AAPL, Microsoft Corp. MSFT and the oil giant Exxon Mobil Corp. XOM
As inflation tumbled in 2023, the Fidelity Stocks for Inflation ETF trailed the SPDR S&P 500 ETF Trust SPY by 7%. If inflation returns, we can anticipate this underperformance to come to a halt, if not reverse.
5. Simplify Interest Rate Hedge ETF PFIX
The ETF, operated by Simplify Asset Management Inc., engages in direct and derivative investments in various U.S. Treasury securities, U.S. Treasury Inflation-Protected Securities (TIPS), and investment grade bonds with different maturity dates.
The primary objective of this ETF is to provide investors with a safeguard against potential increases in interest rates. Notably, during the period between March 14, 2022, and October 25, 2022, the Simplify Interest Rate Hedge ETF experienced a remarkable 100% increase in value. This gain was propelled by the Federal Reserve’s notably aggressive monetary policy tightening during that time.
Should inflation once again experience an upswing, the demand for instruments designed to hedge against interest rate fluctuations is also likely to surge.