6/16 - Weekly Economic Highlights
Jun 16, 2023 | Weekly Highlights
The Federal Open Market Committee (FOMC) met earlier this week and in a welcome development refrained from increasing the Fed Funds rate after nine straight rate increases of varying magnitudes. Financial conditions have tightened materially over the course of the past twelve plus months and given the well documented stresses in the regional banking sector, as well as the FOMC’s desire to continue to shrink the size of the Federal Reserve’s balance sheet, the Chandler team is an agreement with the FOMC’s policy decision. However, market participants viewed the FOMC’s decision as a ‘hawkish’ pause, expecting further tightening in the future, primarily based on the updated release of the FOMC’s Summary of Economic Projections (SEP) forecast. Notably the SEP is forecasting higher GDP, a lower unemployment rate, and higher PCE inflation compared to the March 2023 forecast. The central tendency around the projected appropriate Fed Funds policy path was also increased to 5.4% to 5.6%, compared to the prior forecast of 5.1% to 5.6%. The Chandler team is forecasting the trajectory of the economy will begin to soften more materially in the coming months, thus we think the go forward economic data needs to surprise to the upside for the FOMC’s SEP projections on the appropriate policy rate to come to fruition.
The Consumer Price Index (CPI) was updated this week with the headline number coming in slightly below expectations at 0.1% month-over-month while the core CPI index remained firm at 0.4% month-over-month. The well documented ‘base effect’ is having a larger impact on the headline number, as CPI on a year-over-year basis was 4.0% in May compared to 4.9% in April, whereas Core CPI only had a modest year-over-year decline with a reading of 5.3% in May compared to 5.5% in April. The Chandler team expects core inflation to continue to moderate but be very challenged to get all the way down to the Federal Reserve’s 2% objective over an intermediate time horizon. The Producer Price Index was also released this week and continues to trend lower, with the headline number -0.3% and the core number 0.2% month-over-month. Retail sales figures were updated on Thursday and the headline number came in above expectations at 0.3% month-over-month however the less volatile ‘control group’ was a touch lower at 0.2% month-over-month, signaling some softening in economic activity. Also of note, weekly jobless claims continue to tick higher, with the weekly release again above 250k at 262k, and the four-week moving average inching higher as well to 247k compared to the prior week’s four week moving average of 238k.
Treasury benchmark interest rates moved moderately higher on a week-over-week basis. Notably the two-year Treasury note is thirteen basis points higher at 4.72% and the five-year Treasury note is eight basis points higher hovering close to 4%. The Chandler team believes interest rates will be range bound in the coming months as monetary policy is clearly in restrictive territory and the Federal Reserve treads cautiously going forward. The resiliency of future economic data will determine if the Federal Reserve can stay on hold for a period of time or will be forced to tighten policy further to bring inflation back down towards their 2% policy objective.
Housing Starts, Building Permits, Chicago Fed National Activity Index, Existing Home Sales, Leading Economic Indicators, and S&P Global PMIs
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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.