CPI Surprise May Boost Equity and Bond ETFs

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

There could be more volatility this week as the latest inflation data - the March Consumer Price Index - will be released on Wednesday.

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

Compared to 0.4% in the previous two months, the core CPI would fall 3.7%, above the Fed's inflation target of 2%.

However, in the marketplace, unexpected mass is more important than anticipation.

If inflation in March deviates significantly from economists' expectations, then we could see bond ETFs and even equity ETFs fluctuate significantly.

No rate cuts?

Last week, Minneapolis Federal Reserve Bank President Neel Kashkari suggested that if inflation stays high, the Fed may not need to cut rates at all this year.

If March's CPI numbers come in higher than expected, investors may begin to believe this view, pushing Treasury yields closer to 5%.

On the other hand, if March's CPI comes in lower than expected, it could lead to a perception that the higher inflation in January and February was just a bump in the road, and bond yields could fall back.

Equally interesting is the reaction of the stock market. So far this year, the stock market has been a success, with the Standard & Poor's 500 Index rising by double digits.

If the inflation figures pick up again, it could change the course, while lower-than-expected data could vindicate the stock market bulls.

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