5/20- Weekly Economic Highlights

5/20- Weekly Economic Highlights

Market volatility remains elevated and the sought after ‘consolidation phase’ with more stable market dynamics in both the equity and fixed income sectors remains elusive. Risk assets performed well on Tuesday, post the constructive retail sales report, only to move lower on Wednesday as idiosyncratic news on the state of the consumer linked to the performance of big box retailers caused market angst. More evidence is emerging that consumers are moving away from durable goods consumption with COVID restrictions easing which is negatively impacting the earnings outlook of companies not properly positioned for the shift in behavior. Empire Manufacturing and the Philadelphia Fed Index supported the trend, both coming in well below consensus expectations. The data this week is supportive of the view that core inflation will move lower in the second half of the year, however, the visibility on the pace and magnitude of the adjustment remains a challenge for market participants.

The Treasury curve exhibited a modest flattening bias on a week over week basis, with the Two Year/Ten Year Treasury spread tightening by approximately 12 basis points to a spread of 0.22%. Market based measures of inflation also moved lower on the week, with the Ten-Year Treasury Inflation Protection Security (TIPS) break even inflation rate down to 2.65%, approaching the upper bound of the Fed’s comfort zone for this metric. Despite tightening financial conditions and the weak performance of risk assets, the Chandler team believes the Federal Open Market Committee (FOMC) will continue to remove policy accommodation with a 50 basis point increase to the Fed Funds rate at the June 15th meeting with further increases at subsequent meetings.  Additionally, the Federal Reserve’s balance sheet will begin to contract in early June as the Fed allows $47.5 billion in the month to roll off and not be reinvested back into the market.

Late next week the market will get an update on the first quarter Gross Domestic Product (GDP) forecast as well as Personal Consumption Expenditures (PCE) inflation. The current consensus forecast for Core PCE inflation on a month over month basis is 0.3%, with the year over year number forecast at 4.9%; provided the numbers come in at consensus both would be welcome developments for market participants. 

Next Week:

Chicago Fed National Activity Index (CFNAI), New Home Sales, FOMC Meeting Minutes, PCE Deflator

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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.