7/28 - Weekly Economic Highlights

As was widely anticipated, this week the Federal Open Market Committee (FOMC) voted unanimously to raise the federal funds rate by 0.25% to a target range of 5.25% to 5.50%, the highest level in over 20 years. Fed Chair Powell maintained that the FOMC will remain data dependent going forward, and that they do not anticipate a recession, leaving the option open for the possibility of additional rate hikes in the future if needed. Central banks around the world followed suit, with the ECB raising rates by 0.25% as well to combat inflation, and a surprise announcement from the Bank of Japan to allow yields on its bonds to move higher, a relaxation of its yield curve control policy.

The Fed was carefully watching this morning’s Personal Consumption Expenditures (PCE) report, which confirmed that inflation is moderating; the PCE Deflator dropped to 3.0% year-over-year in June versus 3.8% in May, the lowest level since March of 2021. The Fed’s preferred inflation gauge, Core PCE, which excludes volatile food and energy, fell to 4.1% year-over-year from 4.6% in the prior month, decelerating to 0.2% on a month-over-month basis. Meanwhile personal income fell to 0.3% month-over-month for June. Personal spending ramped up 0.5% month-over-month in June, jumping 0.4% after adjusting for inflation, highlighting the strength of the US consumer despite tighter credit conditions. Robust spending came at the expense of the US personal savings rate, however, which dropped back to 4.3% for June from 4.6% in May, remaining well below the longer run average of about 7%. 

Another key datapoint that was released this week was the first estimate of Q2 US GDP, which exceeded expectations at an annualized rate of 2.4%. Consumer spending on goods and services, and business outlays for equipment were major drivers of growth last quarter. The Bloomberg consensus is currently calling for 1.5% growth for 2023.

Housing prices dipped 1.7% year-over-year in May according to the S&P CoreLogic Case Shiller Index. Chicago topped the 20-city list with a gain of 4.6%, while San Francisco and Seattle both saw price declines of slightly over 11% over the last year. Tight inventories and 30-year fixed mortgage rates of around 7% continue to impact affordability. New Home Sales for June were down 2.5% after three consecutive months of gains, but were still up 23.8% year-over-year.

This week’s data also included some leading economic indicators, starting off with the Chicago Fed National Activity Index, which edged lower to -.32 in June, forecasting slower growth. Consumer Confidence surged to 117.0 as of mid-July, shattering consensus expectations calling for 112.0. The increase was mainly driven by a positive view of current conditions and optimism for business conditions. 

Bond yields moved higher this week, with the 2-year US Treasury increasing by 8 basis points to 4.90% as of this writing, the 5-year climbing 11 basis points to 4.20% and the 10-year is trading at around 3.97% after briefly topping 4.00% yesterday, an increase of 13 basis points on the week. The yield curve inversion persists, with the difference between the 10-year and 2-year US Treasury flattening to about -93 basis points versus -98 basis points as of last weeks’ close.

Chicago PMI, Job Openings and Labor Turnover Survey (JOLTS), ISM Manufacturing, ISM Services Index, Total Vehicle Sales, ADP Employment Change, US 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 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. The Chicago Fed National Activity Index is a monthly index designed to gauge overall economic activity and related inflationary pressure. The index is a weighted average of 85 indicators of national economic activity drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories. A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.