January’s inflation print surprised to the upside, sending major equity benchmarks tumbling in trading Wednesday. In a complex inflation and interest rate environment, active management may prove a boon.
Headline inflation rose 3% in January while core inflation (excludes food and energy) climbed to 3.3%. The rise proved faster than analyst and economist expectations, with headline inflation gaining 0.5% month-over-month on a forecasted 0.3%. Core inflation, a metric closely watched by the Fed, climbed 0.4% on a monthly basis on expectations of 0.3%.
Jennifer Nash, economic and market research analyst at VettaFi Advisor Perspectives, noted January’s headline CPI of 3% is the highest in eight months and the fourth consecutive month of gains.
Federal Chair Jerome Powell explained in his second day of appearances in front of the House Financial Services Committee that the regulatory body made “great progress” thus far on inflation, reported CNBC. However, “we’re not quite there yet. So, we want to keep policy restrictive for now.”
The economic and inflationary impact of recently enacted tariffs remains to be seen. The potential for tariff wars also creates added risk in 2025 markets, which could drive further inflationary pressures that further complicate the interest rate narrative.
Active Strategies Could Prove Beneficial In 2025 Bond Markets
It all creates a complex environment of elevated risks and uncertainty regarding inflation and interest rates. In such a dynamic environment, actively managed strategies could prove a boon, particularly within bonds. In the wake of the CPI print, yields on the 10-year U.S. Treasury climbed above 4.6%.
Actively managed strategies offer a number of potential benefits for investors. Perhaps most relevant to the current environment is the ability to respond to changing market or macro factors. Surprises like January’s CPI print often create volatility within markets, as sentiment and outlooks rapidly change. Many active managers have the ability to shift portfolio allocations and weightings to better position for the new market environment when major shifts occur.
Equally relevant for today’s market environment is the ability of actively managed strategies to be selective with exposures. An environment of persistent, sticky inflation creates challenges for equities. This, in turn, can potentially trickle through to the risk profiles for corporate bonds and more. The ability to be selective about bond exposures may help to curtail default risks or dampen the effects of volatility, depending on the strategy.
Investors looking to add actively managed bond strategies to their portfolios would do well to look to the bond ETF suite from T. Rowe Price. These include — but are not limited to — the T. Rowe Price QM U.S. Bond ETF (TAGG ), the T. Rowe Price Ultra Short-Term Bond ETF (TBUX ), and the T. Rowe Price Intermediate Municipal Income ETF (TAXE ).
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