11/18 - Weekly Economic Highlights
Nov 18, 2022 | Weekly Highlights
Recent inflation data releases from both the Consumer Price Index (CPI) and Producer Price Index (PPI) have been constructive for market participants, supporting asset prices and adjusting expectations for the future path of monetary policy. Last Thursday, November 10th, CPI was released, and both the headline and core numbers came in moderately below consensus expectations, pushing down the y/y year numbers for both headline and core CPI. The October y/y headline number was 7.7% versus 8.2% y/y in the prior month, and 6.3% y/y for the core number, versus 6.6% in the prior month. The trends in CPI inflation are poised to continue to improve as the elevated readings from November and December in 2021 roll out of the index. The PPI index was released on November 15th and the prints were also below consensus expectations on the headline and core numbers, lowering the y/y trends from the prior month. Both headline and core PPI ticked down 0.4% on a y/y basis to 8.0% and 6.7%, respectively. The PPI, consistent with the CPI, is also poised to benefit from high monthly readings of the prior year rolling out of the index in coming months.
Retail sales were released this week and the data surprised to the upside, beating consensus expectations on the headline, ex auto, and control group basis. The resilient US consumer, in the face of high inflation, high interest rates, and poor performance of risk assets in 2022, should be supportive of reasonable GDP growth in Q4 2022. In aggregate, the Chandler team continues to believe the underlying data trends are supportive of the Federal Reserve continuing to remove policy accommodation via increasing the Fed Funds rate, however we believe the rate of change is poised to be reduced considering the totality of tightening financial conditions in 2022. Inflation metrics are beginning to trend lower, but remain much too high, and we believe are likely to be very challenged to move down to the 2% objective over an intermediate time horizon (12 to 24 months).
The Chandler team is observing a dichotomy in capital market dynamics, with credit spreads firming and moving lower, equity prices higher, offset by further inversion of the US Treasury Yield curve. Two Year Treasury notes yield 4.50%, and the Ten Year Treasury yields 3.83%, a spread of -0.67% as of mid-morning PST on November 18th. The level of yield curve inversion is becoming more pronounced and is historically an ominous signal about the future trajectory of the economy. We believe the divergent pricing across the capital markets reflects varying market views on whether or not the US economy will experience a ‘soft’ or ‘hard’ landing due to tightening financial conditions to offset much too high inflation in the domestic and global economies. We believe the probability of soft landing, with below trend but positive GDP growth, increases if the Federal Reserve is able to pause on the rate hike path in the Q1 2023. If inflation metrics do not continue to cooperate and trend lower, we believe the trajectory of the Fed Funds rate will increase well above 5%, and along with it a higher likelihood of negative GDP growth and an economic downturn in 2023.
Chicago Fed National Activity Index, Durable Goods, S&P Global PMIs, University of Michigan Sentiment Index, and New Home Sales.
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© 2022 Chandler Asset Management, Inc. An Independent Registered Investment Adviser. Data source: Bloomberg and Federal Reserve. 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.