Economic data releases were light and bond yields remained volatile this week as market participants positioned their portfolios ahead of next week’s Federal Open Market Committee’s (FOMC) two-day meeting starting next week on December 13th. We believe the FOMC is likely to increase the federal funds rate 0.50% at its December meeting, lifting the target range to 4.25%-4.50%.
Service sector activity remains strong. The Institute of Supply Management (ISM) Service index showed the service sector continued to expand at a faster pace in November as the holiday season bolstered business activity while the price component of the index confirmed that inflationary pressures remain in the service sector despite more widespread disinflation in goods. US producer prices for November rose 0.3% for the month and were up 7.4% from a year earlier, slightly higher than the consensus forecast driven by increases in services. Meanwhile, the University of Michigan Consumer Sentiment survey for December increased to 59.1 from 56.8 for the prior month. In the same survey, the median one-year inflation expectation for participants fell to 4.6% from 4.9%, while median inflation expectations for the next 5-10 years remained unchanged at 3.0%.
Treasury yields moved lower this week. The 2-year treasury fell 9 basis points to 4.29% after starting the week at 4.38%, and the 10-year fell 4 basis points to 3.54% as of Friday morning. The yield inversion between the 2-year and 10-year treasury fell 4 basis points to 0.75%. The average 30-year fixed rate mortgage fell to 6.28% from a near term high of 7.08% on November 10th, according to Freddie Mac.
Next week, the focus will shift to the FOMC decision on December 14th. The FOMC is likely to increase the federal funds rate by 0.50% lifting the target range to 4.25%-4.50%. Market participants will look to the statement and press conference for any guidance toward future changes to monetary policy. Prior to the meeting, the FOMC and market participants will receive the release of the November Consumer Price Index (CPI), a key data point in the overall inflationary environment. The Chandler team continues to believe the FOMC will tighten monetary policy to a restrictive stance and hold rates at that level for a period of time. In this challenging environment, we continue to remain disciplined with our strategies and take advantage of higher rates to invest in our clients’ portfolios.
Next Week:
National Federation of Independent Business (NFIB) Small Business Optimism, Consumer Price Index (CPI), FOMC meeting, Empire Manufacturing, Retail Sales, Initial Jobless Claims, Industrial Production, S&P Global US Manufacturing and Service Purchasing Managers Index.
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© 2022 Chandler Asset Management, Inc. An Independent Registered Investment Adviser. Data source: Bloomberg and Federal Reserve. 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.