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Interest Rate Sensitive Themes Rise With June Cuts in Focus Amid PCE Data

ETF Market Canada - Mon Mar 4, 6:24PM CST

The Alternative Energy theme has endured considerable setbacks with year-to-date losses amounting to 0.93%, and 8.95%, until last week, in the wake of a dreadful 2023 year. The theme, along with others such as Biotech & Genomics, known for their sensitivity to the level of interest rates, has been struggling under the weight of a high-rate regime for a long time. However, the paradigm might change following encouraging inflation data and optimism about future rate cuts.

A Silver Lining: PCE Data Ignites Investor Optimism

Following the release of upbeat inflation data, investors may look at these themes with renewed optimism. The PCE data for January — the Fed’s preferred inflation gauge specifically focusing on the core index that excludes volatile energy and food prices — eased from 2.9% to 2.8%, as announced by the U.S. Department of Commerce on Thursday. The reading spurred hopes that inflation will fall in the coming months, giving the Federal Reserve enough impetus to begin lowering rates in June, to steer inflation towards a target of roughly 2%.

Considering the recent PCE data, expectations of decreased rates have sparked a notable improvement in the performance of sectors highly sensitive to interest rate changes. As an illustration, the alternative energy theme, along with the biotech & genomics industry, have shown the first signs of overcoming previous setbacks with gains of 4.20% and 4.10% respectively for the week.

Looking Ahead: What This Means for Investors

This pivotal juncture underscores the importance of staying attuned to inflation data, such as the PCE price index, for investors within interest rate-sensitive investments. With the potential for rate cuts on the horizon, sectors that bore the brunt of a high-rate environment are now at the forefront of investor interest, promising a landscape replete with opportunities for those who navigate it wisely.

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Funds Specific Data: XEG, ZCLN, CDNA, FBT

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