by Jack Fischer.
The Federal Reserve has been prepping the market for the latest CPI results for what feels like an eternity. While the Fed has acknowledged the recent price increases, they plan on continuing their accommodative monetary policy until a strong labor market forces a more permanent increase in wages. Investors have been warned time and time again of transitory inflation as the economy reopens and consumer demand spikes. Only recently has the party line wavered, when Treasury Secretary Janet Yellen said, “It may be that interest rates will have to rise somewhat to make sure our economy doesn’t overheat.” These comments, which have been walked back, caused a stir in the market, highlighting just how sensitive investors are to inflationary fears.
Even with the set expectations of a rough CPI report, the market was still shocked to see just how large the price increases were—CPI data released Wednesday revealed a 4.2% year-over-year increase. This drastically beat the expectations of a 3.6% increase and marked the largest 12-month increase since September 2008. While base effects come into play since the economy was in full lockdown a year ago, monthly numbers showed a significant bump as well. The one-month increase of 0.8% was led by Used Cars and Trucks (+10.0%, its largest monthly increase to date) and Transportation Services (+2.9%). Equity markets reacted poorly to the data as the DJIA (-1.99%) and S&P 500 (-2.14%) each posted their lowest daily returns since January and February, respectively.
Given the macro-economic environment, we will continue to touch on Lipper classifications that have seen significant flows in the face of inflationary fears. We’ve already talked about Lipper Inflation Protected Bond Funds, but another way investors have been hedging against inflation is through commodity funds. The Lipper Commodities General Funds classification (including both conventional mutual funds and ETFs) saw their largest weekly inflow to date (+$615 million). The classification suffered a weekly outflow during the first week of the year—since then Commodities General Funds have recorded 18 straight weeks of inflows. ETFs have taken in $419 million while conventional funds saw $196 million in weekly net inflows over the course of the last Lipper fund-flows week (for more weekly trends check out U.S. Weekly FundFlows Insight Report)
A common perception of commodity funds is their relatively low correlation of returns to broad equity markets. Over the past year, Lipper Commodities General Funds supported that belief, as seen in the above table. Along with a hedge against other asset classes, inflation tends to lead to price appreciation of real assets. Lumber, oil, and gasoline have all seen recent spikes helping the commodity funds macro-group outperform the remaining Lipper equity macro-groups year to date.Even after a record-breaking week of inflows, Commodities General Funds are poised to continue their inflows streak as long as inflation expectations remain high.