5/26 - Weekly Economic Highlights

Economic data released this week had to take a back seat to the headlines associated with the latest news regarding debt ceiling negotiations. On Wednesday, Fitch Ratings placed the U. S. Government AAA credit rating on negative watch, Fitch cited political brinkmanship, rising budget deficits, and unsustainable debt trajectory. As such, it is possible Fitch could downgrade the US Government even if the debt ceiling is raised. Of note, Chandler’s expectation is an agreement will likely be reached, but we also acknowledge the growing risk as we move closer to June 1^st, the date identified by Treasury Secretary Janet Yellen as the date the U.S, government might not be able to pay its obligations. Away from the debt ceiling impasse, financial markets received a lot of economic data this week inclusive of a key gauge of US inflation. The Personal Consumption Expenditures (PCE) Index rose faster than expected at 4.4% year-over-year in April, higher than expectations of 4.3%. Excluding food and energy, the core PCE price index, the Federal Reserve’s (Fed) preferred inflation gauge, climbed 4.7%, surpassing expectations of 4.6% and higher from the prior month read of 4.6%. Although the Fed unanimously agreed to lift the overnight rate at their meeting earlier this month, Fed minutes released on Wednesday showed a divided Fed over the prospect of a rate pause. The minutes reflected some members are ready to pause rate hikes while others are still too concerned about inflation and believe additional tightening is appropriate. A unanimous decision at the June 13-14^th meeting next month regarding a rate hike or a pause might prove to be difficult.

Additional data released this week included an estimate for first quarter US GDP growth which was revised up to 1.3% from 1.1%. Personal spending added 2.52 percentage points revised up from 2.48 and government consumption was revised to 0.89 from 0.81. The Chicago Fed National Activity index (CFNAI) climbed slightly higher than trendline growth on a monthly basis in April at 0.07, but the 3-month average remains stubbornly under trendline at -0.22. Improvement was seen across major components such as production, employment, and personal consumption, and fifty-two out of the eighty-five indicators improved from the prior month.

The University of Michigan Consumer Sentiment index came in at 59.2 for May, down from 63.5 in April. Consumers inflation expectations are 4.2% for the coming year, down from 4.6% last month, and the 5-year measure, a closely watched indicator for the Fed moved slightly higher to 3.1% from the prior months read of 3.0%. Durable Goods Orders increased 1.1% beating survey expectations of -1.0%. Inclusive of the 3.3% seen in March, Durable Goods Orders are up two consecutive months.

The housing market got some positive news this week with new home sales rising unexpectedly by 4.1% to an annualized pace of 683,000 units in April from a downwardly revised 656,000 in March. The median sales price of a new home dropped 8.2% from the prior year to $420,800. According to the National Association of Homebuilders new home construction currently accounts for approximately a third of housing inventory but averages about 10% of total sales. According to Freddie Mac, the U.S. weekly average for a 30-year fixed rate mortgage was 6.57% up from a 6.39% average last week.

Debt ceiling concerns and signs of economic resilience resulted in treasury yields moving significantly higher this week; the 2-year treasury is up 34 basis points to 4.61% after starting the week at 4.27%, and the 10-year is up 12 basis points to 3.83% as of Friday morning. In addition, the yield inversion between the 2-year and 10-year treasury widened from last week, ending the week at approximately 78 basis points. In a holiday shortened week, market participants will turn their attention to home prices, consumer confidence and employment data which will be released next Friday. Although the Chandler Team believes the Fed is quickly approaching a pause in this hiking cycle, given the recent signs of economic resilience, we believe the FOMC will leave their optionality open based upon incoming data.

Next Week:

S&P CoreLogic Case Shiller 20-City Home Price Index, Conference Board Consumer Confidence, S&P Global US Manufacturing PMI, ISM Manufacturing, JOLTS Job Openings and Labor Turnover Survey, Federal Reserve Beige Book, ADP Employment Change, Employment 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 Conference Board Leading Economic Index® (LEI): The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle. The indexes are constructed to summarize and reveal common turning points in the economy in a clearer and more convincing manner than any individual component.