An investment theme for the Chandler team going into 2022 centered around markets being at an inflection point; given the adjustment higher in Treasury yields and the volatility in equity markets in January the theme looks to stay in place going forward. Although market prices have been adjusting to the elevated inflation readings for some time, the notable news of the past week was the Federal Reserve Chair Powell’s press conference after the conclusion of the January 25-26 Federal Open Market Committee (FOMC) meeting. Since the onset of the coronavirus pandemic in 2020, global central banks have worked mostly in a synchronized fashion to suppress market volatility and support the economic recovery with both conventional (i.e. low interest rates) and more unconventional (i.e. quantitative easing) means. Although several developed market central banks remain highly accommodative in their policy stance, the FOMC is poised to shift their policy stance in 2022, with the first tightening of the Fed Funds rate telegraphed at the March 16th meeting. The FOMC is also forecasting a passive reduction in the size of the Federal Reserve balance sheet to commence later in the year, signaling the FOMC will wait for at least one meeting after the first rate hike before the contraction begins. Despite the hawkish tone from Fed Chair Powell, we believe the FOMC will remain data dependent going forward as monetary policy and interest rates are normalized. The evolution of inflation metrics over the course of 2022 is the key determinant on how much tightening of policy the FOMC will implement in 2022. We believe inflation will begin to moderate later in the year, allowing the FOMC to adjust policy in a measured way without materially disrupting the economic recovery.
Economic data this week was mostly constructive, although somewhat backward looking relative to the developments since the beginning of the year. The Case Shiller 20 City Home Price Index was released on Tuesday and showed house price up 18.3% year over year, however the data release was as of November 2021. The advance report on Q4 GDP was released on Thursday and surprised to the upside, coming in at 6.9% compared to the consensus market expectation of 5.5%. This morning additional inflation data was released, with the Employment Cost Index coming in at 1.0%, slightly below expectations, and the PCE Deflator and PCE Core Deflator both remaining uncomfortably high on a year over basis for policy makers, at 5.8% and 4.9%, respectively. Next week will bring several top tier data releases, including ISM Manufacturing and ISM Services, as well as the January 2022 employment report on Friday, February 4. The Chandler team will be acutely focused on some of the underlying data in the unemployment report in the coming months, specifically the participation rate, the unemployment rate, and average hourly earnings to determine if our view on the inflation outlook is justified.
Next Week:
ISM Manufacturing, ISM Services, ADP Employment, and Non-Farm Payrolls.
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© 2022 Chandler Asset Management, Inc. An Independent Registered Investment Adviser. Data source: Bloomberg, Federal Reserve, and the US Department of Labor. This report is provided for informational purposes only and should not be construed as specific investment or legal advice. The information contained herein was obtained from sources believed to be reliable as of the date of publication, but may become outdated or superseded at any time without notice. Any opinions or views expressed are based on current market conditions and are subject to change. This report may contain forecasts and forward-looking statements which are inherently limited and should not be relied upon as an indicator of future results. Past performance is not indicative of future results. This report is not intended to constitute an offer, solicitation, recommendation, or advice regarding any securities or investment strategy and should not be regarded by recipients as a substitute for the exercise of their own judgment. Fixed income investments are subject to interest rate, credit, and market risk. Interest rate risk: The value of fixed income investments will decline as interest rates rise. Credit risk: the possibility that the borrower may not be able to repay interest and principal. Low-rated bonds generally have to pay higher interest rates to attract investors willing to take on greater risk. Market risk: the bond market, in general, could decline due to economic conditions, especially during periods of rising interest rates. The S&P Corelogic Case-Shiller home price index tracks monthly changes in the value of the residential real estate in 20 metropolitan regions across the nation.