Consumer prices in the United States ticked up 2.5% year over year in April 2018, up from 2.4% in March and in line with market expectations. Core inflation, which eliminates food and energy, was flat at 2.1%. Year over year, prices shot up faster for fuel oil (22.6% versus 20% in March) and gasoline (13.4% versus 11.1%).
However, inflation lessened for electricity (1.2% compared with 2.2%) transportation services (4.1% versus 4.3%), utility piped gas service (1% versus 3.4%), used cars and trucks (down 0.9% from 0.4%) and new vehicles (down 1.6% compared with a decline of 1.2%).
The monthly inflation rate rose 0.2% from 0.1% in March but lagged expectations of 0.3%. Moderation in healthcare prices counterbalanced the rise in cost of gasoline and rental accommodations.
The gasoline index jumped 3.0%, more than compensating the declines in other energy component indices and resulting in a 1.4% rise in the overall energy index. The food index inched up 0.3%, with the food at home index advancing 0.3% but the index for food away from home increasing 0.2%.
Will the Fed be Hawkish Now?
The yield on 10-year benchmark U.S. Treasury dropped to 2.97% on May 10, as inflation data could not beat expectations. Market watchers still expect an interest rate hike by the Fed in June. Notably, an overwhelming 98% of the forecasters bet on a June rate hike.
Needless to say, such investors’ expectations pushed up short-term Treasury yields as one-month and three-month yields rose by 1-bp (to 1.69%) and 2-bps (to 1.90%). The Treasury yield curve from five to 30 years was the flattest since August 2017, reflecting weaker-than-expected U.S. inflation and strong demand for a record bond auction.
But the moderate inflation data raises the question about how hawkish the Fed can be in the rest of this year. Probably this is why SPDR S&P 500 ETF Trust (NYSEARCA:SPY), SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) and PowerShares QQQ Trust (NASDAQ:QQQ) added about 0.93%, 0.84% and 1.04%, respectively, on May 10. PowerShares DB US Dollar Bullish ETF (NYSEARCA:UUP) lost about 0.5% on the day.
Against this backdrop, we highlight a few ETF ideas that could be intriguing in a moderate inflationary environment.
ETF & Stock Picks
On a monthly basis, food-away-from-home inflation was lower than food at home. This along with a solid labor market should encourage consumers to dine out. Also, there were moderate year-over-year price increases in food (1.4% from 1.3%) and apparel (0.8% from 0.3%). Decent demand, modest price increases and the benefit of tax reform should thus benefit restaurant, leisure and entertainment companies.
PowerShares Dynamic Leisure & Entertainment Portfolio (NYSEARCA:PEJ)
The fund holds 30 companies engaged in the production or distribution of goods or services in the leisure and entertainment industries. The fund charges 61 bps in fees and has a Zacks Rank #2 (Buy).
Brinker International, Inc. (NYSE:EAT)
With a Zacks Rank #2, Brinker is one of the world’s leading casual dining restaurant companies. The stock hails from a top-ranked (top 23%) Zacks industry.
Gasoline prices are on a tear. Inflation data gives cues of that. The product soared to the highest level since Hurricane Harvey, courtesy of Trump’s exit from the Iran deal.
US Gasoline Fund (NYSEARCA:UGA)
The underlying index of the fund looks to reflect the changes in the price of gasoline. It charges 75 bps in fees.
California Resources Corp (NYSE:CRC)
The Zacks Rank #2 company is engaged in the exploration and production of oil and gas. It belongs to a top-ranked (top 39%) Zacks industry.
The rally in home prices is known to all. The shelter index increased 0.3% in April sequentially which should drive homebuilders’ margins.
SPDR S&P Homebuilders ETF (NYSEARCA:XHB)
The fund holds 35 stocks and charges 35 bps in fees.
KB Home (NYSE:KBH)
The Zacks Rank #1 (Strong Buy) company constructs and sells a variety of new homes. It comes from a top-ranked (top 11%) Zacks industry.
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