Ten-Year and Thirty-Year Treasury notes traded with a yield in excess of 4% this week, moving back to yield levels not seen since November 2022. Market sentiment has shifted as the disinflation theme prevalent at the beginning of the year is dissipating with the resilient economic data thus far in 2023. The Chandler team continues to hold the view policy rates will rise to a sufficiently restrictive stance and stay on “hold” for the balance of 2023 to allow the tightening of financial conditions, notably exhibited via the increase in real interest rates, to work its way through the financial system and put downward pressure on inflation. Given the Chandler team’s view on the trajectory of monetary policy, we continue to believe the interest rate differential between the Fed Funds rate and the Two-Year Treasury note should be relatively tight. Given the 70 basis point move higher in the Two-Year Treasury note yields between January 31st and today, to a yield around 4.90%, the market is coming around to our view.
Economic data releases this week were mixed, with the more interest rate sensitive elements continuing to face headwinds, offset by the services side of the economy remaining robust. The S&P Core Logic Case-Shiller 20 City Home Price Index was released on Tuesday and the year-over-year increase in house price appreciation continues to decelerate, coming in at 4.65% as of December 2022 compared to the November 2022 increase of 6.76%. Consumer Confidence also came in below expectations at 102.9, but remains above 100, a demarcation line for the Chandler team. On Wednesday, the ISM Manufacturing Index was released and continues to show contraction in the sector, coming in at 47.7 in February compared to 47.4 in January. The weakness in the manufacturing sector is being offset by the services side of the economy, with the ISM Services Index release this morning continuing to show expansion, coming in at 55.1. Weekly jobless claims also remain exceptionally low, at only 190k this week, which continues to foreshadow a constructive employment backdrop for the first half of 2023.
The next Federal Open Market Committee (FOMC) meeting takes place on March 22nd, and policymakers will have additional top tier economic data to digest over the coming two weeks to incorporate into both their decision on monetary policy adjustments and the update to the quarterly Summary of Economic Projections forecast. Notably the February employment report will be released next Friday, followed by the Consumer Price Index release on Tuesday, March 14th. Chandler’s base case anticipates the Federal Reserve will continue to increase the Fed Funds rate in twenty-five basis point increments, and if the trends in inflation do not cooperate, the date at which the FOMC can pause will be extended. In our view, the tightening of financial conditions over the course of the past year will be sufficient for the trends in inflation to moderate and allow the Fed Funds rate to stabilize marginally above 5%.
Next Week:
ADP Employment, Trade Balance, JOLTS, and Payrolls report.
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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. The S&P Corelogic Case-Shiller home price index tracks monthly changes in the value of residential real estate in 20 metropolitan regions across the nation.