1/20 - Weekly Economic Highlights

Market volatility continued this week as investors digested softer economic data.  The December Producer Price Index (PPI) confirmed a declining inflation trend, and weak retail sales provided evidence of slower consumer spending and economic growth.  Producer prices fell 0.5% month-over-month in December and increased 6.2% year-over-year, decelerating from November’s 7.3% year-over-year increase.  The Core Producer Price Index (PPI Ex-Food and Energy) rose just 0.1% for the month and 5.5% year-over-year in December, down from 6.2% year-over-year growth last month.  Energy disinflation was the most significant factor in December’s lower numbers, while food prices came down marginally as well. Retail sales dropped 1.1% in December after a downward revision to a 1% decline in November. Retail sales rose 6% year-over-year in December, unchanged from November’s year-over-year gain. Weakness was widespread among core retail and food service sectors.  Non-store retailers, motor vehicles, and gasoline all softened as well. Softer inflation and growth data should provide support for a downshift in the magnitude and pace of Fed rate hikes. 

Industrial production fell 0.7% in December after a downward revision to -0.6% in November. The decrease was due to declines in production for manufacturing and mining, while utilities output rose sharply due to cold weather.  Capacity utilization dropped to 78.8% in December from 79.4% in November. 

The housing sector continued to demonstrate weakness in December, but trends are moderating with lower mortgage rates. Housing starts fell 1.4% month-over-month in December to 1.382 million units and were down 21.8% compared to December 2021.  The dip was entirely due to a 19% decline in starts of multi-unit homes but was somewhat offset by an increase in starts of single-family homes as mortgage rates eased.  Existing home sales fell 1.5% in December to 4.02 million units and were down 34% compared to a year ago. While home resales declined for the 11th month in a row, the pace of decline is decelerating. The 30-year fixed rate mortgage fell to an average of 5.95% last week according to Freddie Mac, down from a peak of over 7% in November.

Equities dropped this week on concerns of lower economic growth, and US Treasury rates fell across the curve.  The 2-year US Treasury fell 6 basis points to 4.17%, the 5-year dropped 4 basis points to 3.57%, and the 10-year declined 3 basis points to 3.47% (as of Friday morning).  The curve remains deeply inverted at 70 basis points between the 2-year and 10- year treasury. 

The consensus market view continues to diverge from the Fed’s projected rate path.  Additionally, opinions within the Federal Reserve lack consistency, as reflected in speeches by several Fed governors this week.  What remains clear is the likelihood of further rate hikes, although the magnitude and duration are uncertain.  The Chandler team believes that the Fed will continue to tighten monetary policy at a slower pace and remain restrictive for some time, and uncertainty will continue to fuel market volatility.

Next Week:

Leading Index, S&P Global US Manufacturing PMI, S&P Global US Services PMI, Richmond Fed Manufacturing Index, Chicago Fed National Activity Index, GDP Annualized QoQ, New Home Sales, Durable Goods Orders, PCE, University of Michigan Sentiment

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© 2023 Chandler Asset Management, Inc. An Independent Registered Investment Adviser. Data source: Bloomberg and Federal Reserve. 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.