5/05 - Weekly Economic Highlights

This week market participants were focused on continued stress in the banking sector, the Federal Open Market Committee meeting, and the US labor market. Regional banks remain under pressure due to unrealized losses on long-term bond investments, exposure to commercial real estate lending, and reduced demand for low-yielding deposits. Concerns resurfaced in the market earlier this week causing a flight-to-quality rally in US treasuries.

Mid-week, investors turned their attention to the FOMC meeting. At the May 3^rd meeting, the Federal Open Market Committee voted unanimously to raise the target federal funds rate by 0.25% to a range of 5.00% - 5.25% as expected. Notably, the committee omitted a line from its March statement referencing that “some additional policy firming may be appropriate.” Instead, the FOMC will determine “the extent to which additional policy firming may be appropriate”, implying a potential pause. Fed Chair Powell indicated that a pause will be data dependent, and the future rate path will take cumulative tightening and lagged effects into account. The statement also emphasized that the U.S. banking system is “sound and resilient” and acknowledged the tightening in financial conditions.   Powell reiterated the committee’s focus on bringing down inflation to their 2% target and indicated that their outlook did not support rate cuts, contrary to the market consensus.

The April employment report demonstrated resilience in the labor market and supported the Fed’s forecast for higher rates for a longer period. The U.S. economy added 253,000 jobs in March, and the prior two months were revised downward by 149,000.   The private sector reported broad gains, led by professional and business services, healthcare, and leisure and hospitality. The unemployment rate fell to 3.4%, and the participation rate remained unchanged at 62.6%. The U-6 underemployment rate, which includes those who are marginally attached to the labor force and employed part time for economic reasons, declined to 6.6% from the prior month at 6.7%. Average hourly earnings rose 4.4% year-over-year in April, up from a 4.3% increase in March, adding to inflationary pressures. Separately, according to the March JOLTS (Job Openings and Labor Turnover) report, the number of available positions decreased for a third consecutive month to 9.59 million, indicating a slower demand for labor and increased layoffs. The ratio of openings to unemployed people ticked down to 1.6 in March, the lowest since October 2021. While the overall pace of hiring is slowing, levels remain consistent with a solid labor market.

Markets were volatile this week, with the 2-year US Treasury declining approximately 7 basis points to 3.94%, the 5-year down 5 basis points to 3.43% and the 10-year up 4 basis points to 3.46% at the time of this writing. The yield inversion between the 2-year and 10-year treasury narrowed to -48 basis points. Considering the totality of economic data, the Chandler team continues to believe the Fed is likely near a pause in their rate hiking cycle and will maintain higher rates for some time.

Next Week:

Wholesale Trade Sales and Inventories, Consumer Price Index, Producer Price Index, University of Michigan Sentiment, Import Price Index, Export Price 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.