5/05 – Weekly Economic Highlights
This week market participants were focused on continued stress in the banking sector, the Federal Open Market Committee meeting, and the US labor market. Regional banks remain under pressure due to unrealized losses on long-term bond investments, exposure to commercial real estate lending, and reduced demand for low-yielding deposits. Concerns resurfaced in the market earlier this week causing a flight-to-quality rally in US treasuries.
4/28 – Weekly Economic Highlights
Although economic data was fairly light this week, there was a full slate of speaking engagements by members of the Federal Reserve. Each of the Fed speakers, including Federal Reserve Bank of New York President John Williams, were consistent in their messaging for the near-term direction of monetary policy. Williams, who is also Vice-Chairman of the Federal Open Market Committee emphasized that inflation was still too high, and monetary policy tools would be used to restore price stability. The Vice Chairman does diverge from the majority of other central bank members in that he does not expect a recession which was disclosed in the meeting minutes from the March FOMC meeting last week. Each speaker who addressed the topic of monetary tightening signaled the need for at least one additional rate increase to curtail inflation.
4/21 – Weekly Economic Highlights
Although economic data was fairly light this week, there was a full slate of speaking engagements by members of the Federal Reserve. Each of the Fed speakers, including Federal Reserve Bank of New York President John Williams, were consistent in their messaging for the near-term direction of monetary policy. Williams, who is also Vice-Chairman of the Federal Open Market Committee emphasized that inflation was still too high, and monetary policy tools would be used to restore price stability. The Vice Chairman does diverge from the majority of other central bank members in that he does not expect a recession which was disclosed in the meeting minutes from the March FOMC meeting last week. Each speaker who addressed the topic of monetary tightening signaled the need for at least one additional rate increase to curtail inflation.
4/14 – Weekly Economic Highlights
Investors had a large amount of economic data to process this week, with the March Consumer Price Index (CPI) headline numbers coming in slightly lower than expected, up 0.1% month-over-month and 5.0% year-over-year, moderating from +6.0% in February. Core CPI, which excludes the volatile food and energy components, increased 5.6% year-over year in March, a slight uptick from the previous month. Housing was by far the largest contributor to the increase, along with gains in restaurant dining and new car prices. Since shelter data tends to lag, that factor is expected to fade in the coming months. There were declines in the prices of energy, used cars and trucks, medical care services, and groceries during the month. In other inflation news, the Producer Price Index (PPI) fell 0.5% in March, the largest monthly drop since April 2020, as wholesale prices for goods, especially gasoline, declined. Supply chain disruptions and commodity prices eased from last year when Russia’s invasion of Ukraine caused a spike, but OPEC+ production target cuts are expected to be inflationary.
4/07 – Weekly Economic Highlights
The Chandler team has been calling for positive, but below trend growth, in the first half of 2023 and in aggregate the data releases this week were supportive of the view. The ISM Manufacturing Index continues to face headwinds, coming in at 46.3 for March, compared to 47.7 in the prior month. This is the fifth month in a row with the index below 50.0, signaling contracting activity in the sector. The ISM Services Index also disappointed relative to recent trends with a reading for March of 51.2 compared to the prior months 55.1, but encouragingly still shows expansion in the sector. The Bureau of Labor Statistics updated the Job Openings and Labor Turnover Survey (JOLTS), which is reported with a one-month lag, and for the first time since May 2021 the number of job openings was below 10 million, signaling the tightening of financial conditions is starting to impact the labor market. In a further indication the labor market is not as tight as previously believed, the Department of Labor updated their seasonal factors for weekly unemployment insurance claims and the recent trends show a four-week moving average of 238k; prior to the revisions the four-week moving average was below 200k.
3/31 – Weekly Economic Highlights
Financial market volatility eased as participants took a breather from the hectic pace that occurred over the last few weeks. Markets digested a key gauge of US inflation, the Personal Consumption Expenditures (PCE) Index which rose 5% year-over-year in February, an improvement over January’s report. Excluding food and energy, the core PCE price index, the Federal Reserve’s (Fed) preferred inflation gauge, climbed 4.6%, matching the smallest increase since October 2021. Recent inflation data suggests tighter monetary policy by the Fed is working to bring down inflationary pressures. The Fed is likely to remain steadfast in its campaign to achieve its 2% inflation goal but market participants remain split as to the possibility of an additional rate hike at their May 3rd meeting.
3/24 – Weekly Economic Highlights
Market participants were highly focused on central bank activity around the world this week. The Bank of England hiked the benchmark rate another 25 basis points on the heels of the European Central Bank’s 50-basis point rate hike. Most significantly here in the U.S., at the March 22nd meeting, the Federal Open Market Committee voted unanimously to raise the target federal funds rate by 0.25% to a range of 4.75 – 5.00%. Fed Chair Powell reiterated the committee’s focus on bringing down inflation to their 2% target, which remains most persistent for non-housing services prices. However, the committee softened language about “ongoing increases” in rates in the prior statement to “some additional policy firming may be appropriate”, with a focus on “may” and “some”. The statement also emphasized that the U.S. banking system is “sound and resilient” and acknowledged the tightening in financial conditions. Powell indicated that the extent of these effects is uncertain but speculated that tighter credit conditions could be equivalent to a rate hike or more. The Summary of Economic Projections was little changed, with the consensus target federal funds rate rising to 5.1% by the end of 2023 (implying one more quarter point hike), falling to 4.3% in 2024 (up from 4.1% previously), and declining to 3.1% by the end of 2025. No rate cuts were in the Fed’s base case for this year, contrary to the market consensus. Although projections imply policymakers are winding down interest rate hikes, the statement clearly reflected optionality for the Fed to remain data dependent. Rates plummeted across the curve as the market priced in tighter financial conditions, slower economic growth, and future rate cuts. The Chandler team believes the Fed is likely near a pause in their rate hiking cycle.
3/17 – Weekly Economic Highlights
Economic data this week including top tier inflation data was overshadowed by Silicon Valley Bank being placed in receivership reflective of financial stress in the U.S. regional banking sector as well as the global banking system when Credit Suisse, one of the biggest but troubled financial institutions in the world, was informed by its largest shareholder that it would not provide further equity capital support. Fortunately, both circumstances were addressed in an expeditious manner by their respective regulators. In the U.S., the Treasury department, Federal Reserve, and Federal Deposit Insurance Corporation jointly put policies in place to ensure bank deposit availability for individuals and corporations. U.S. Regulators also addressed pending liquidity concerns for the banking sector with the establishment of the Bank Term Funding Program, allowing banks to obtain liquidity from the Federal Reserve via pledging assets as collateral for cash as opposed to selling securities, assisting in alleviating bank balance sheet stress. Subsequent to the action taken by regulators in the U.S., the Swiss central bank stated on Wednesday it was going to provide financial support to Credit Suisse. The following day, Credit Suisse said it intended to borrow up to 50 billion Swiss Francs ($53.68 billion) through a covered loan facility and short-term liquidity facility but in spite of these regulatory actions, market confidence has yet to be restored. The recent financial stress when combined with getting inflation under control present a major challenge for the Fed in determining the appropriate path for monetary policy.
3/10 – Weekly Economic Highlights
US Nonfarm payroll employment rose by 311,000, beating expectations calling for a 225,000 increase in jobs for the month of February. The leisure and hospitality, retail trade, government and healthcare sectors saw the largest gains. The unemployment rate ticked up to 3.6% due to more workers entering the labor force as the participation rate increased to 62.5%, the highest level since March 2020. Workers between the ages of 25 and 54 led the expansion, with significant gains for women and minorities who comprised a disproportionate amount of the job losses during the pandemic. Over time, more workers in the labor market should help ease inflationary pressures. Average hourly earnings were up 0.2% month-over-month, the slowest increase in a year, and rose 4.6% on a year-over-year basis, primarily driven by the service industry. In other labor market news, the Job Openings and Labor Turnover (JOLTS) survey fell to 10.8 million, but remains elevated, and initial jobless claims edged up slightly to 211,000.
3/03 – Weekly Economic Highlights
Ten-Year and Thirty-Year Treasury notes traded with a yield in excess of 4% this week, moving back above yield levels not seen since November 2022. Market sentiment has shifted as the disinflation theme prevalent at the beginning of the year is dissipating with the resilient economic data thus far in 2023. The Chandler team continues to hold the view policy rates will rise to a sufficiently restrictive stance and stay on “hold” for the balance of 2023 to allow the tightening of financial conditions, notably exhibited via the increase in real interest rates, to work its way through the financial system and put downward pressure on inflation. Given the Chandler team’s view on the trajectory of monetary policy, we continue to believe the interest rate differential between the Fed Funds rate and the Two-Year Treasury note should be relatively tight. Given the 70 basis point move higher in the Two-Year Treasury note yields between January 31st and today, to a yield around 4.90%, the market is coming around to our view.