In a surprise to markets, on Tuesday the Bank of Japan finally capitulated and adjusted their yield curve control policy foreshadowing further adjustments to monetary policy settings in 2023. The Japanese Yen has been under pressure and weakening for most of 2022, and by increasing the ceiling on how high they will allow Japanese ten year yields to trade to 0.50% from 0.25%, the Bank of Japan joined the majority of other developed market central banks in tightening financial conditions in 2022. The adjustment to policy by the Bank of Japan provided a catalyst for yields to climb higher on a week-over-week basis in the United States as well as other sovereign debt markets.
It was a heavy week for economic releases and the data continues to paint a mixed picture on the underlying strength of the economy. Consumer Confidence surprised to the upside, coming in at 108.3 in December compared to consensus expectations of 101.0. The Conference Board’s present situations sub index was also constructive, increasing to 147.2 compared to the prior month’s revised reading of 138.3. The market was also provided an update to third quarter GDP, and the number was revised upward by 0.3% to 3.2%. The advance report for fourth quarter GDP will not be released until late January 2023, with the widely followed Atlanta Fed GDP Nowcast model forecasting fourth quarter GDP growth of 2.7% as of December 20, 2022. The model is updated weekly, and the Chandler team would expect some moderation in the forecast as more data is released, but encouragingly the GDP estimate for the fourth quarter remains well above ‘stall speed’ for the US economy. This week is the survey week for December employment report; weekly jobless claims remain relatively low at 216k indicating the payrolls report for December, released in early January 2023, is unlikely to show material deterioration. One area of concern is the Leading Economic Indicator index at -1.0 as of November 2022, the ninth month in a row with a negative reading.
The PCE Deflator, the Federal Reserve’s preferred inflation data series, was released this morning and the y/y number moved lower by 0.5% to 5.5% while the PCE Core Index moved lower by 0.3% on a y/y basis to 4.7%. Due to the base effects from very elevated PCE inflation readings in late 2021 and early 2022, the y/y inflation numbers for both series are poised to continue to moderate in coming months, which we believe will provide an opportunity for the Federal Reserve to pause their campaign to increase the Federal Funds rate in the first quarter of 2023. The Chandler team continues to believe inflation readings will move lower but be challenged to get close to the Federal Reserve’s target of 2% over an intermediate time horizon (12 to 24 months), thus we anticipate monetary policy settings will maintain a restrictive stance for the balance of the coming year. Benchmark Treasury yields drifted higher on the week, with the two year Treasury notes increasing by 12 basis points to 4.30%, the five year Treasury note increasing by 22 basis points to 3.84%, and the ten year Treasury note increasing by 24 basis point to 3.72%, as of this morning. We expect the elevated interest rate volatility to persist in 2023 until market participants obtain better visibility on the underlying economic outlook and monetary policy settings in 2023.
Next Week:
S&P CoreLogic CS Home Price Indices, Pending Home Sales, and Chicago PMI.
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