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.
2/24 – Weekly Economic Highlights
The market digested top-tier economic data this week along with a hawkish tone reflected in the minutes from the Federal Reserve’s Open Market Committee meeting on February 1st. Both the headline Personal Consumption Expenditures (PCE) Index and the Core PCE Index (excluding food and energy) accelerated more than expected in January, increasing 0.6% month-over-month. The headline index rose 5.4% and the core index 4.7% year-over-year, exceeding both last month’s increase and consensus expectations. Prices for both goods and services appreciated on a widespread basis. Expenditures on goods were led by motor vehicles and pharmaceuticals, while spending on services was led by rent and food services. The personal savings rate increased to 4.7%, to a seven-month high.
2/17 – Weekly Economic Highlights
This week’s top tier economic data focused on inflation both at the consumer and producer level. The headline Consumer Price Index (CPI) rose 0.5% in January versus the upwardly revised -0.1% reading in December. Inflation increased 6.4% year-on-year, down from 6.5% in December. Core CPI, excluding the volatile food and energy components, increased to 0.4% in January and 5.6% on a year-on-year basis, decelerating from 5.7% in December. Key factors contributing to inflation in January were housing, food, gasoline, and natural gas. Inflation at the producer level rebounded in January above the consensus of market participants. The Producer Price Index (PPI) jumped 0.7% last month and 6.0% year-over-year bolstered by higher energy costs. Core PPI, excluding the volatile food and energy components, rose 0.5% in January and 5.4% year-over-year. Inflation appears to be stickier than many market participants anticipated and remains above the Fed’s target providing another data point for the Fed to continue to increase the federal funds rate at its next meeting.
2/10 – Weekly Economic Highlights
Although economic data was relatively light this week, numerous members of the Federal Reserve including Fed Chief Powell were consistent in their messaging this past week regarding the need for additional rate increases to curtail inflation. Another consistent theme among all Fed members interviewed this week was the strength of last week’s labor market report showing employers added 517,000 workers in January and an unemployment rate of 3.4%, the lowest rate since 1969. Chair Powell in a moderated discussion at the Economic Club of Washington, D.C. referenced the employment report, stating that “it shows you why we think this will be a process that takes a significant period of time.” In addition, Federal Reserve Bank of New York President John Williams at a Wall Street Journal event in New York referenced wage growth, which is above levels necessary to reach the Federal Reserve’s 2% goal for inflation.
2/03 – Weekly Economic Highlights
This morning’s employment report surprised to the upside with 517,000 jobs added to the US economy in January, crushing consensus expectations for 188,000 and pushing the unemployment rate down to 3.4%. Hiring was broad-based across industries with leisure and hospitality, professional and business services, and government hiring leading the gains. In addition, upward revisions for November and December totaled +71,000 jobs. The labor force participation rate ticked up slightly to 62.4%, although still running below the pre-pandemic level of 63.3%. Average hourly earnings declined to 4.4% year-over-year in January from 4.8% year-over-year in December, a sign that a key component of inflation is moderating.
1/27 – Weekly Economic Highlights
Interest rates continue to trade in recently established ranges but did migrate higher over the course of the week, correlated with the generally constructive economic data and next week’s Federal Open Market Committee (FOMC) meeting on February 1st. The advance report on fourth quarter GDP was released on Thursday and moderately surprised to the upside, coming in at 2.9% compared to the consensus estimate of 2.7%, but notably below the widely followed Atlanta Fed GDP Now model which predicted growth of 3.5%. The underlying details of the GDP report were mixed, with household and government spending solid, somewhat offset by a higher-than-expected inventory build, which could be a drag on growth in the first half of 2023. This morning PCE inflation was released and more or less came in at expectations, with the PCE Deflator at 0.1% month-over-month and 5.0% year-over-year, a drop of 0.5% from the prior annualized number, and the PCE Core Deflator coming in at 0.3% month-over-month and 4.4% year-over-year, a drop of 0.3% annualized. Notably, in Chandler’s view, weekly jobless claims remain quite low, most recently at 186k per week, well beneath the 250k caution area. The totality of the recent data remains consistent with an outlook for positive, but below trend growth in the first half of 2023, with the trajectory of the economy not yet approaching stall speed.