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The Chandler team has been calling for positive, but below trend growth, in the first half of 2023 and in aggregate the data releases this week were supportive of the view. The ISM Manufacturing Index continues to face headwinds, coming in at 46.3 for March, compared to 47.7 in the prior month. This is the fifth month in a row with the index below 50.0, signaling contracting activity in the sector. The ISM Services Index also disappointed relative to recent trends with a reading for March of 51.2 compared to the prior months 55.1, but encouragingly still shows expansion in the sector. The Bureau of Labor Statistics updated the Job Openings and Labor Turnover Survey (JOLTS), which is reported with a one-month lag, and for the first time since May 2021 the number of job openings was below 10 million, signaling the tightening of financial conditions is starting to impact the labor market. In a further indication the labor market is not as tight as previously believed, the Department of Labor updated their seasonal factors for weekly unemployment insurance claims and the recent trends show a four-week moving average of 238k; prior to the revisions the four-week moving average was below 200k.

Financial market volatility eased as participants took a breather from the hectic pace that occurred over the last few weeks. Markets digested a key gauge of US inflation, the Personal Consumption Expenditures (PCE) Index which rose 5% year-over-year in February, an improvement over January’s report. Excluding food and energy, the core PCE price index, the Federal Reserve’s (Fed) preferred inflation gauge, climbed 4.6%, matching the smallest increase since October 2021. Recent inflation data suggests tighter monetary policy by the Fed is working to bring down inflationary pressures. The Fed is likely to remain steadfast in its campaign to achieve its 2% inflation goal but market participants remain split as to the possibility of an additional rate hike at their May 3rd meeting.

Market participants were highly focused on central bank activity around the world this week. The Bank of England hiked the benchmark rate another 25 basis points on the heels of the European Central Bank’s 50-basis point rate hike. Most significantly here in the U.S., at the March 22nd meeting, the Federal Open Market Committee voted unanimously to raise the target federal funds rate by 0.25% to a range of 4.75 – 5.00%. Fed Chair Powell reiterated the committee’s focus on bringing down inflation to their 2% target, which remains most persistent for non-housing services prices. However, the committee softened language about “ongoing increases” in rates in the prior statement to “some additional policy firming may be appropriate”, with a focus on “may” and “some”. The statement also emphasized that the U.S. banking system is “sound and resilient” and acknowledged the tightening in financial conditions. Powell indicated that the extent of these effects is uncertain but speculated that tighter credit conditions could be equivalent to a rate hike or more. The Summary of Economic Projections was little changed, with the consensus target federal funds rate rising to 5.1% by the end of 2023 (implying one more quarter point hike), falling to 4.3% in 2024 (up from 4.1% previously), and declining to 3.1% by the end of 2025. No rate cuts were in the Fed’s base case for this year, contrary to the market consensus. Although projections imply policymakers are winding down interest rate hikes, the statement clearly reflected optionality for the Fed to remain data dependent. Rates plummeted across the curve as the market priced in tighter financial conditions, slower economic growth, and future rate cuts. The Chandler team believes the Fed is likely near a pause in their rate hiking cycle.