Is stagflation happening? | Nasdaq

JApril’s consumer price index came in at 8.3%, and although slightly lower than March’s 8.5%, it was still higher than expected. More telling was the report on core CPI, a measure of inflation minus energy and food, which came in at 6.2%. This figure is higher than expected and a great signal that inflation has not peaked yet.

Core CPI was a 0.6% month-over-month gain and means that real wages, when adjusted for inflation, fell 0.1% for hourly workers, the average hourly gain of 0.3% continuing to lag inflation, CNBC reports. Average hourly earnings over the past year have advanced, gaining 5.5%, but inflation has systematically reduced those earnings, leaving average real earnings at a loss of 2.6% over the past year.

“Wednesday’s CPI data once again surprised on the upside and the market now expects the Federal Reserve to raise interest rates another 190 basis points by the end of 2022. “said Nancy Davis, founder of Quadratic Capital Management, in a communication to ETF Trends. . “Investors should keep in mind that the Federal Reserve’s aggressive forward guidance has already moved interest rate markets and is failing to control realized inflation.”

As the Fed signals a 0.50% increase in interest rates in June and July, as Federal Reserve Chairman Jerome Powell has signaled his desire to anticipate rate hikes and begin to cut the Fed’s balance sheet in June, markets have fallen on investor fears since last Thursday.

Davis believes rate hikes won’t impact some of the inflationary pressures at play, such as supply chain issues, and hikes alone don’t provide solutions to raise commodity prices. raw materials, a tight labor market, etc.

“The combination of high inflation and Federal Reserve rate hikes increases the risk of stagflation, which is a dire environment for investors that typically results in stocks and bonds losing value simultaneously,” said Davis. “We may already be in a stagflationary environment, as stocks and bonds have lost value together so far this year, inflation remains high and the economy contracted in the first quarter.”

Investing for stagflation with IVOL

the Quadratic Interest Rate and Inflation Volatility Hedging ETF (IVOL) of KFAFunds, a KraneShares company, is managed by Nancy Davis and is designed to double hedge against an increase in fixed income volatility and/or an increase in inflation. The fund also seeks to maximize increases in the yield curve, caused either by rising long-term interest rates or falling short-term interest rates; both are tied to steep declines in the stock market.

“We should not assume that the Federal Reserve will be able to control inflation. Inflation-linked assets can provide diversification and could be useful in a portfolio in case inflation does not come down as quickly as expected. says Davis.

IVOL is the first of its kind in active and passive options and provides access to the OTC bond options market, the mechanism it uses for long-term interest rate volatility. The fund invests in a combination of US Treasury Inflation-Protected Securities (TIPS) of any maturity, which are US government bonds whose principal increases with inflation.

IVOL also invests in long options directly linked to the shape of the interest rate swap curve in the United States, which steepens when the difference between the exchange rates of long-term debt instruments and the short-term debt instruments rise, flatten as the spread narrows, and reverse. when the spread is negative.

IVOL is actively managed by Quadratic Capital Management, an alternative asset management firm experienced in the options and volatility markets. He plans to invest less than 20% of the fund in option premiums and seeks to buy options with an expiry date of between six months and two years.

IVOL has an expense ratio of 1.05% and manages nearly $1.65 billion in assets.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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