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3 Sector ETF & Stocks to Play April Inflation Data

Sanghamitra Saha
United Fire's (UFCS) 10.7% rise in dividend reflects its impressive operational performance.

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%) (read: 4 Country ETFs That Should be Beneficiaries of $70 Oil).

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 SPY, SPDR Dow Jones Industrial Average ETF DIA and PowerShares QQQ ETF QQQ added about 0.93%, 0.84% and 1.04%, respectively, on May 10. PowerShares DB US Dollar Bullish ETF 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

Consumer Discretionary

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 And Entertainment Portfolio 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. 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.

Energy

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 Commodity Funds United States Gasoline Fund LP UGA

The underlying index of the fund looks to reflect the changes in the price of gasoline. It charges 75 bps in fees (read: ETFs & Stocks in Focus as Trump Reimposes Sanction on Iran).

California Resources Corporation 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.

Homebuilding

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 XHB

The fund holds 35 stocks and charges 35 bps in fees (read: Q1 GDP Growth Beats Estimates: ETFs to Buy).

KB Home 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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