11/3 - Weekly Economic Highlights

Longer-term interest rates moved lower, and the equity market turned positive on a week-over-week basis as recent economic data releases exhibited the impact of the well documented tighter financial conditions. The Chandler team has been calling for the velocity of the economy to moderate and this week’s data support the outlook. Treasury yields were already in a downward trend prior to the release of this morning’s monthly payroll report, which showed job gains of 150k compared to the consensus estimate of 180k. The report also showed negative revisions from the prior two months, bringing the three-month moving average on job gains to a still strong 204k, but down materially from the January 2023 three-month moving average of 334k. The unemployment rate ticked up 0.1% to 3.9%, still consistent with full employment but foreshadowing a less robust labor market outlook. Average hourly earnings were below expectations at 0.2% month-over-month compared to the consensus estimate of 0.3%; this brought the year-over-year number to 4.1%, a welcome development for the inflation outlook. Automatic Data Processing (ADP) also puts out a monthly employment report that contains more granular information on wage trends the Chandler team follows closely. The ADP report delineates year-over-year wage gains from “job stayers” compared to “job changers” with the recent report showing the former at 5.7% year-over-year compared to 8.4% for the latter. Although the wage gains numbers are still too high to be consistent with the Federal Reserve’s 2% inflation objective, the job stayers annual wage number was 7.3% as of December 2022 and job changers was 15.2%, another trend consistent with tighter financial conditions and a less robust labor market with wage inflation data trending in the right direction. Other prominent data releases also disappointed, with both ISM Manufacturing and ISM Services surveys moving lower from the prior month, at 46.7 and 51.8, respectively. 

The Federal Open Market Committee (FOMC) concluded their seventh meeting of the year on Wednesday, November 1, and for the second meeting in a row kept the target Fed Funds rate unchanged at 5.25% to 5.50%. Market participants interpreted the FOMC statement as somewhat dovish, with the formal statement noting “tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.” During the press conference concluding the meeting, Federal Reserve Chair Jerome Powell also noted the stance of policy is restrictive, the full effects of the tightening have yet to be felt, and the process of getting inflation to 2% has a long way to go. The Chandler team believes monetary policy needs to remain restrictive for longer to continue to put downward pressure on inflation but given the current trends in both core CPI and core PCE inflation, do not believe a further tightening in the Fed Funds rate is required for the Federal Reserve to eventually achieve their 2% policy objective on core inflation. 

As longer-term interest rates have moved higher over the course of the year, concerns related to the elevated issuance from the US Treasury to fund the US deficit have become more paramount. The US Treasury announced their quarterly refunding plans this week, with auction sizes on three-year notes, ten-year notes, and thirty-year bonds all increasing from the prior quarter. In a welcome development, relative to fears of further deficit financing, the US Treasury announced it anticipates one additional quarter of increases to coupon auction sizes will likely be needed beyond what was announced this quarter. Next Wednesday, November 8, the US Treasury will auction $40 billion of new ten-year Treasury notes and given the recent volatility of longer-term interest rates how market participants absorb the auction will be an important litmus test. 

The Chandler team anticipates the elevated interest rate volatility experienced of late will dissipate in the coming quarter provided the economic data trends observed this week continue. We have been calling for positive but below trend growth and have been surprised by the resiliency of the US consumer and overall economy thus far in 2023. We believe our outlook will come to fruition in the first half of 2024 given the totality of the change in interest rates, overall tighter financial conditions, and the impact to the growth outlook of the US economy.

Trade balance, Consumer Credit, Jobless Claims, and University of Michigan Sentiment Indicators

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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.