Insights | Chandler Asset Management

6/21/24 - Retail Sales and Fed Highlights Economic Moderation Concerns

Written by Admin | Jun 21, 2024 7:33:52 PM

In a week shortened by one day in celebration of the Juneteenth holiday, this week’s economic data was supportive of the narrative that the economy is continuing to moderate. Retail Sales data for May came in below estimates and pointed to a fatigued consumer. US retail sales increased just 0.1% after a downwardly revised 0.2% drop in the prior month. The retail sales control group data, which feeds into the quarterly GDP reading and excludes more volatile categories such as food services, rose 0.4% in May after falling 0.5% in the prior month. Overall, the report reflected a cautious consumer, that will continue to be influenced by inflation, and the uncertainty surrounding the ongoing strength of the labor market.

Earlier in the week, several Federal Reserve officials re-emphasized the need for more evidence that inflation is on a sustainable path of deceleration before lowering interest rates. Both New York Federal Reserve Bank President John Williams and Richmond’s President Thomas Barkin emphasized the importance of not just recent, but future economic data in determining the fed’s policy path moving forward. Fed Governor Adriana Kugler’s comments were slightly more specific regarding timing, she stated it would be appropriate to cut rates “later this year”. Overall, Federal Reserve officials’ commentary this week was consistent with last week’s release of the Federal Open Market Committee’s Summary of Economic Projections reflecting only one interest rate cut in 2024, down from three projected in March with four more cuts expected in 2025. In our view, a soft-landing for the economy remains our base case, however, if the Fed maintains a restrictive stance for too long, it will increase the chance of a policy error heightening the probabilities of a meaningful slowdown in the US economy.

On the labor front, initial applications for unemployment benefits were up slightly versus expectations. The Initial Jobless Claims report reflected 238,000 in the week ended June 15, above the estimated 235,000. The four-week moving average increased to 232,750, which is the highest level since last September. Continuing Claims also came in moderately higher than expected at 1.828 million for the week ending June 8th.

Reflecting economic stress from higher mortgage rates, housing data fell short of expectations this week. Housing starts decreased 5.5% to a 1.28 million annualized rate last month, and building permits fell 3.8% to 1.39 million. Sales of existing homes decreased 0.7% from the prior month to a 4.11 million annualized rate. It was the third straight month sales of existing homes declined as home affordability continues to plague the housing market. According to the National Association of Realtors, the median sales price increased 5.8% from last year to a record $419,300.

Treasuries experienced a brief sell off early Friday after US services activity expanded by the most in over two years. The S&P Global US Services Purchasing Managers Index (PMI) rose to 55.1, the highest level since April of 2022. In contrast to the PMI report, the Leading indicators for the US economy declined for the third consecutive month to -0.5% which was below the survey of Bloomberg economists of -0.3%.

Irrespective of weaker than expected retail sales and housing data, bond yields were little changed this week. At the time of writing, the 2-year US Treasury is trading at 4.73% and 10-year at 4.26%. Although markets will primarily be focused on the release of Personal Consumption Expenditures (PCE) next week. Consumer Confidence will provide another data point to consider possibly signaling additional evidence of a weakening consumer. For the past few years, consumers’ willingness, and ability to maintain spending has been a vital component of economic strength. Moving forward, the resiliency of the US consumer is a critical question for the economy and markets.

Next Week:

Philadelphia Fed Non-Manufacturing, Chicago Fed National Activity Index (CFNAI), S&P CoreLogic Case Shiller 20-City Index, Consumer Confidence, Richmond Fed, New Home Sales, GDP Q1 Third Estimate, Initial/Continuing Jobless Claims, Durable Goods, Pending Home Sales, Personal Consumption Expenditures (PCE), University of Michigan Sentiment

 

© 2024 Chandler Asset Management, Inc. An Independent Registered Investment Adviser. All rights reserved. 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.