10/14 - Weekly Economic Highlights

The market digested key inflation data this week, starting out with the Producer Price Index (PPI) which increased by 0.4% in September, versus -0.2% for August and up 8.5% year-over-year. The jump reflected higher costs for services, food, and energy. Thursday’s highly-anticipated Consumer Price Index (CPI) update for September came in hotter than expected, up 8.2% year over year versus consensus expectations for 8.1%, but was down slightly from 8.3% in August. The Core CPI, which excludes volatile food and energy components, jumped to 6.6% year-over-year, up from 6.3% in August and the highest level since 1982. The report included widespread increases, particularly in food, shelter, and medical care services. Owners’ equivalent rent, which is a major contributor to CPI and tends to lag, was up 6.7% year-over-year.

The University of Michigan consumer-sentiment survey from the first half of October improved to 59.8 but reflected renewed concern about recent price increases for gasoline. The index also indicated pessimism regarding housing affordability, however, was buoyed by a positive view of durable goods such as large appliances and cars. Advance retail sales were flat for the month but were up 8.2% year-over-year in September, slowing from August’s 9.4% year-over-year gain that surprised to the upside. Retail sales growth is starting to reflect the headwinds from higher prices as consumers dip into savings and assume more debt.

There is increasing concern among market participants and the Federal Reserve (Fed) that inflation remains elevated despite easing supply chain issues. Demand has been resilient, and the war in Ukraine continues to disrupt the food and energy sectors, particularly in Europe. Persistent, elevated inflation has put upward pressure on interest rates, and the US dollar has strengthened as a result. The 2-year US Treasury is up to 4.50%, the 5-year US Treasury is at 4.27%, and the 10-year US Treasury is currently trading at 4.01%. The yield curve inversion between 2- and 10-year US Treasuries has increased to nearly -50 basis points. Although a yield curve inversion is a predictor of future recession and possibly lower interest rates in the future, Chandler believes that the strong labor market and consumer demand makes recession in the US unlikely for now.

Next Week:

Empire Manufacturing, Industrial Production, Housing Starts, Fed Beige Book, Existing Home Sales, Leading Economic Indicators (LEI)

Copyright © 2022. All Rights Reserved.

© 2022 Chandler Asset Management, Inc. An Independent Registered Investment Adviser. Data source: Bloomberg, Federal Reserve, and the U.S. 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 rate.