11/17 - Weekly Economic Highlights

The highly anticipated Consumer Price Index (CPI) inflation report for October was released on Tuesday, coming in slightly lower than expected with no change month-over-month and an increase of 3.2% on a year-over-year basis. Headline CPI was reined in by falling gasoline prices in the month. Core CPI, which excludes the volatile food and energy sectors, rose 0.2% from September and 4.0% versus one year ago. Inflation in rents and services decelerated, while auto prices and airfares fell in October. Another measure of inflation, the Producer Price Index (PPI), declined 0.5% versus the prior month and was up 1.3% year-over-year, well below consensus expectations. The energy sector was responsible for much of the downdraft in goods prices, while the service sector was flat for the month.

Advance retail sales also cooled in October, falling 0.1% month-over-month versus an upwardly revised gain of 0.9% in September. Retail sales increased 2.5% on a year-over-year basis versus 4.1% in September. Food and beverage stores, along with health and personal care stores extended their gains in October while gasoline, furniture, car dealers and parts contributed to the month-over-month decline. Student loan payments, which resumed in October, along with higher interest rates and lower savings account balances have been causing consumers to shift some of their spending patterns towards essentials. The only service industry components in retail sales, restaurants and bars, were still strong but we will get a more comprehensive read on the service sector when personal spending data is released at the end of the month. The market will also be closely monitoring the results from Black Friday and the holiday shopping season as a barometer for the health of the US consumer.

A bright spot in the data this week came from the housing sector, with housing starts rising 1.9% over the month of October to 1.372 million units (annualized), mostly due to multifamily home construction. Builders have been offering incentives to entice new home buyers in the face of higher mortgage rates with the average 30-year fixed mortgage rates sitting at about 7.3%, according to Freddie Mac. Tight existing home inventory has also boosted the demand for new homes as a source of supply since many homeowners are not inclined to sell their houses and forfeit their low mortgage rates. Another positive development came from Congress, which passed a continuing resolution that will fund the US Government until early 2024, averting a shutdown that would have likely started this weekend.

Stocks and bonds rallied on the soft inflation and retail sales prints, with the 2-year US Treasury yield falling 0.14% from 5.04% at the end of last week to 4.90%, and the 10-year US Treasury dropping from 4.61% to 4.43% as of this writing. The S&P 500 surged by 2.2% this week, heading toward its highest level since September. The federal funds futures market now reflects no chance of any additional rate hikes from the Federal Reserve and has about 1-2 quarter-point rate cuts priced in for mid-2024. Chandler advises keeping the duration of investment strategies close to the benchmark while maintaining a bias towards high quality securities.

Housing Starts, Leading Economic Indicators (LEI), Chicago Fed National Activity Index, Existing Home Sales, FOMC Meeting Minutes, Durable Goods Orders, University of Michigan Sentiment Index

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© 2023 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.