10/20 - Weekly Economic Highlights

US Treasury rates increased after substantial swings this week, and the curve became significantly less inverted as economic data continued to reflect a resilient consumer and labor market strength. Retail Sales rose 0.7% in September after an upward revision to 0.8% in August, exceeding the consensus forecast. Control Group Sales, which are used to calculate gross domestic product and exclude food services, auto dealers, building materials stores and gasoline stations, rebounded 0.6% and reflected broad increases across sectors. On a year-over-year basis, Retail Sales growth accelerated 3.8% in September versus an upwardly revised 2.9% gain in August. Jobless Claims fell to 198,000 last week bringing the four-week moving average down to an exceptionally low 205,750, indicating that the labor market remains tight. Contrary to the stronger retail sales and employment data, Leading Economic Indicators (LEI) fell 0.7% in September, continuing the persistent decline for the last year and a half. The Conference Board indicated that a "shallow recession" is likely in the first half of next year.

This week featured a full slate of speeches by Federal Open Market Committee (FOMC) members, culminating in Chairman Powell’s remarks at the Economic Club of New York on Thursday. Powell signaled a likely pause at the November meeting, while keeping the option open for hiking at subsequent meetings. He referenced the recent increase in longer-term yields as a tightening of financial conditions, which may reduce the need for further rate hikes. Powell suggested that the FOMC is unlikely to raise interest rates again unless it sees evidence that stronger economic activity threatens continued progress in reaching inflation goals.

Financial markets also reacted to housing data this week. Housing Starts recovered 7% in September to a below expected annual rate of 1.358 million units. Starts were up 17.6% for multi-family units and 3.2% for single-family. Total starts of new homes are down 7.2% year-over-year. Permits declined 4.4% to 1.473 million, led by a drop in multi-family units. Existing Home Sales fell 2% in September to 3.96 million units at a seasonally adjusted annual rate and are down 15.4% compared to a year ago. According to Freddie Mac, average 30-year fixed rate mortgage rates increased to 7.71% as of October 19th. Tight inventories and higher mortgage rates continue to impact affordability and housing market activity.

The inversion in the US Treasury yield curve narrowed materially this week from 45 basis points to just 16 basis points.  The 2-year Treasury rose 2 basis points to 5.07% (at the time of this writing) after touching a 17-year high of about 5.25% this week, and the 10-year Treasury soared 30 basis points to 4.91% off a high of 4.99%, as investors priced in “higher for longer” interest rates. Considering market volatility, geopolitical risks and likely slower economic growth ahead, Chandler recommends maintaining investment strategies at or near benchmark duration and staying up in quality.

Chicago Fed National Activity Index, Philadelphia Fed Non-Manufacturing Activity, S&P Global US Manufacturing PMI, S&P Global US Services PMI, Richmond Fed Manufacturing Index, New Home Sales, Wholesale Inventories, Advance Goods Trade Balance, Gross Domestic Product (GDP), Retail Inventories, Durable Goods Orders, Personal Consumption Expenditures (PCE), Pending Home Sales, Kansas City Fed Manufacturing Activity, Kansas City Fed Services Activity, University of Michigan Consumer Sentiment

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© 2023 Chandler Asset Management, Inc. An Independent Registered Investment Adviser. 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.