Given that the Federal Reserve raised interest rates earlier in September, inflation data that was already crucial has taken on a new meaning. These reports could now serve as a barometer for what is to come from the central bank.
Key Takeaways:
- The August PCE report has come in, showing headline and core inflation far below analyst expectations.
- This can bode well for CLO strategies, which have already benefited amid a higher rate regime, as cooling PCE data may be a good signal for credit quality.
- Those seeking to build access to CLOs may wish to do so through an actively managed framework, such as the Guggenheim Investment Grade CLO ETF (GCLO).
The August personal consumption expenditures (PCE) price index was released on Wednesday, September 30. This new PCE report put headline inflation at 3.4% and core inflation at 3% on an annual basis. Crucially, these numbers are below what analysts were expecting.
Given that the August PCE report came in below analyst consensus, this may have interesting implications for the Federal Reserve. As a reminder, the PCE report is widely known as the Fed’s tried-and-true inflation gauge. With inflation data cooling, the Fed might adjust its plans for shifting interest rates, especially if PCE data remains consistent in the months to come.
These developments obviously will have tremendous implications for one’s fixed income portfolio. After all, many were expecting another rate hike to occur before the end of the year. This new PCE report could very well throw a wrench in those expectations.
Fortunately, there are more than a few fixed income approaches that can perform well in these sorts of conditions. For example, take a look at collateralized loan obligations (CLOs).
To start, CLOs offer floating-rate payouts. As such, when interest rates are high, these securities can subsequently offer high yields.
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Though cooling PCE data doesn’t necessarily support a rate hike, it does work in favor of CLOs. This is because lower PCE is a positive signal for credit quality, which in turn means default rates among CLOs tend to decline.
