At the top of global news this week, the United Kingdom’s Prime Minister Liz Truss announced her resignation as the rapidly expanding chaos surrounding her government proved too much of a burden to effectively lead the UK out of the political and financial morass in which it finds itself. Following credibility-sapping U-turns on September’s mini-budget, enforced cabinet reshuffles, and plunging personal and party opinion poll readings, Thursday’s statement of resignation came as little surprise to financial markets. Initial reaction to the news was mildly positive with gilt yields slightly lower and the pound a little firmer. Key for financial markets is whether Conservative MPs can unite sufficiently to agree on a new leader and provide some stabilization for the world’s sixth largest economy.
US manufacturing data was stronger than expected this week. Industrial production rose 0.4% month-over-month in September stronger than the consensus estimate of 0.1% and led by gains in both durable and non-durable goods. Although demand for merchandise continues to wane, the report revealed production increases were broad based inclusive of motor vehicles, electronics, computers, and furniture. The report also showed capacity utilization at factories increased to 80.3% from an upwardly revised 80.1% in August, running slightly above the 1972-2021 average of 79.6 percent. The New York Federal Reserve Bank manufacturing survey contradicted the strong US manufacturing results with factory activity in October contracting for the third consecutive month, as the general business conditions index fell to minus 9.1 from minus 1.5 in September.
The housing data released this week were consistent with a deteriorating housing market. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) was reported down 8 points to 38 in October, lower for a 10th straight month and the lowest since August 2012 excluding the April-May 2020 period when the pandemic response closed down much of the US economy. Housing starts dropped 8.1% to an annualized rate of 1.44 million from a downwardly revised rate of 1.57 million in August. Builder confidence is dropping as higher mortgage rates, along with elevated costs of materials and labor, continue to weigh on affordability. Given shelter makes up approximately a third of the Consumer Price Index (CPI), negative trends in the housing sector will likely contribute to a deceleration in the CPI measure in coming months. In addition to the weak housing data reported this week, the Conference Board Leading Economic Index for the US fell by 0.4% in September after remaining unchanged for August. The LEI is down 2.8% for the six-month period between March and September 2022, versus its 1.4% growth over the previous six months.
Federal Reserve officials continued to reiterate their resolve to increase the federal funds rate at upcoming meetings of the Federal Open Market Committee (FOMC) this past week. In prepared remarks on Thursday, Federal Reserve Bank of Philadelphia President Patrick Harker stated, “we are going to keep raising rates for a while”. Mr. Harker also expressed his disappointment with the lack of progress on slowing inflation: “inflation is known to shoot up like a rocket and then come down like a feather”. His comments supported the frequently expressed opinions of other FOMC members that they are likely to continue to frontload rate increases and hold them at a restrictive level for the appropriate amount of time to curtail inflation. The Chandler team believes inflation metrics will start to moderate in coming months allowing the Federal Reserve to slow the pace of tightening and possibly follow-through with their current policy outlook of holding a restrictive stance for a longer period of time.
Treasury yields continued to climb higher this week. The 2-year treasury is up 4 basis points to 4.48% after starting the week at 4.44%, and the 10-year is up 21 basis points to 4.22% as of Friday morning. The rate on the 10-year marked its highest level since June of 2008. The yield inversion between the 2-year and 10-year treasury decreased by 17 basis points to the current 26 basis point differential. As a result of the significant increase in longer term rate levels, according to Freddie Mac, the average interest rate on a 30-year mortgage is now up to 6.94%, the highest level since 2006.
Next week’s economic releases provide a broad overview of the US economy with data related to manufacturing activity, housing sales and home prices, inflation, and third quarter Gross Domestic Product (GDP).
Next Week:
Chicago Federal Reserve National Activity Index (CFNAI), S&P Global US Manufacturing and Services Purchasing Manager’s Index , S&P Case Shiller 20-City Home Price Report, Richmond Federal Reserve Manufacturing Index, New Home Sales, Durable Goods Orders, Pending Home Sales, Initial Jobless Claims, 3rd Quarter Gross Domestic Product, Personal Consumption Expenditures, University of Michigan's Sentiment Index
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© 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 rates. The NAHB/Wells Fargo Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next six months as well as the traffic of prospective buyers of new homes.