10/7 - Weekly Economic Highlights

Multiple top-tier economic data released this week continues to suggest the growth backdrop for the US economy remains sound despite the material tightening in financial conditions on a year-to-date basis. The ISM Manufacturing Index came in at 50.9 compared to consensus expectations of 52.4, however the ISM Services Index surprised slightly to the upside, coming in at 56.7 compared to the 56.5 consensus estimate. The divergence in the two ISM numbers is consistent with the broad trends in the economy favoring the services sector whereas the manufacturing sector is experiencing more headwinds linked to supply chain imbalances, higher interest rates, and a stronger US dollar. The jobs report for the month of September was released this morning and continues to point to a strong US labor market with 263k jobs created, the unemployment rate dropping 0.2pp to 3.5%, and the three-month moving average on payrolls a robust 372k. The labor force participation rate remains lackluster at 62.3%, a decrease of 0.1pp from the prior month and below the pre-COVID rate of 63.4% (January 2020). Wages appear to be stabilizing, a constructive development for the inflation outlook, with average hourly earnings on a month-over-month basis remaining unchanged at 0.3% and the year-over-year number declining 0.2pp to 5.0%.

The economic data released this week suggest the Federal Reserve will be challenged to slow the pace of monetary policy tightening at the upcoming November 2^nd Federal Open Market Committee (FOMC) meeting. Market participants are anticipating the rate of change in Fed Funds increases will slow given monetary policy is arguably approaching restrictive territory, considering the 300 basis points (3.0%) of tightening thus far in 2022, the reduction in the size of the Federal Reserve’s Balance Sheet (Quantitative Tightening), and the overall adjustment in multiple market variables, most notably the increase in interest rates and the strength of the US dollar. The Chandler team is anticipating inflation metrics will start to moderate in coming months, however the team continues to believe it will be difficult for inflation metrics to decrease close to the Federal Reserve’s 2% target over the next 12-24 months. We believe the FOMC intends to tighten monetary policy to an appropriate restrictive stance and hold rates at that level for a period of time, acknowledging monetary policy is a blunt tool that works with a lag. Market volatility across asset classes remains elevated, a trend likely to continue until inflation metrics begin moderating, allowing monetary policy to stabilize.

Next Week:

Produce Price Index (PPI), Consumer Price Index (CPI), Retail Sales, and University of Michigan sentiment.

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