8/25 - Weekly Economic Highlights

Treasury yields drifted higher over the course of the week as the light economic data released largely followed recent trends consistent with stable growth. Existing home sales for July came in moderately below expectations at 4.07 million compared to the estimate of 4.15 million, a trend the Chandler team expects to continue given the large disincentive for current homeowners to trade out of existing homes given the difference between existing 30 year mortgage rates (below 3% for many) and the current level of 30 year mortgage rates (7% area). New home sales, where the supply situation provides an opportunity for increased transaction volume, surprised moderately to the upside at 714k compared to the consensus estimate of 703k. Historically the housing sector is one of the more interest rate sensitive sectors of the economy, assisting monetary policymakers in slowing down the trajectory of the economy when interest rates increase, however given the totality of the change in interest rates the transmission mechanism for existing home sales prices to deteriorate is less potent. Next week the S&P Core Logic 20 City House Price Index will be updated, and we expect the data to show house prices are stabilizing despite the much higher cost of financing the purchase of a home.

This morning Federal Reserve Chair Jerome Powell delivered his annual address to the Kansas City Federal Reserve Symposium in Jackson Hole, Wyoming. The theme of this year’s conference was “Structural Shifts in the Global Economy,” and Chair Powell’s speech was titled “Inflation: Progress and the Path Ahead.” In Chandler’s judgment Chair Powell clearly laid out the case this morning for data dependency on the future path of monetary policy, notably highlighting the growth rate of the US economy has surprised to the upside with recent GDP readings above trend. The speech also highlighted the Federal Reserve’s viewpoint that a period of below trend economic growth as well as some softening in labor market conditions are likely prerequisites to get inflation sustainably back to the 2% policy objective. Chandler’s base case has been the Federal Reserve will need to maintain a restrictive policy stance for longer than normal to bring the economy back into balance given the structural shifts in the economy since the onset of the pandemic over three years ago. In our view the overall tight labor market and elevated wage inflation metrics are not poised to soften quickly enough for the
Federal Reserve to be in a position to adjust monetary policy lower over the next six months. The Chandler team is closely monitoring coincident economic indicators and expects the weekly jobless claims figures to eventually deteriorate to readings above 250k sustainably on a week over week basis; the most recent week’s Initial Jobless Claims figures were 230k with the four-week moving average at 237k.

Next week the market will digest a plethora of economic data to help further clarify the future direction of the economy. On Tuesday, in addition to the S&P Core Logic Home Price data, the Bureau of Labor Statistics will release the Job Openings and Labor Turnover (JOLTS) survey, which is forecasted to show the backdrop for employment opportunities remains robust. Consumer Confidence will also be released and given the strong labor market backdrop the positive trends in the indicator are likely to remain in place. On Wednesday, the ADP employment report will be released; the headline number is not typically market moving but the Chandler team is focused on the trends in annual wage increases for job stayers compared to job changers – we expect the elevated increases of late to show some moderation. GDP for the second quarter will also be updated with the market forecasting above trend growth of 2.4% to remain intact. On Thursday, the most important release will be the PCE inflation data – the Chandler team is confident year-over-year core inflation will be close to 4% at year end, supportive of the current level of the Federal Funds rate at 5.25% to 5.50%. The monthly employment report will be released on Friday, right before the long holiday weekend, with expectations for a continued moderation in payroll growth offset by an extremely low unemployment rate and wage inflation above 4% on an annualized basis.

S&P Case Shiller Home Price Index, JOLTS, Consumer Confidence, ADP Employment, GDP, Jobless Claims, Personal Income, Personal Spending, PCE Deflator, Chicago PMI, Employment Report, and ISM Manufacturing

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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.