2/18- Weekly Economic Highlights

Market sentiment shifted this week to a risk-off mentality as the threat of a Russian invasion into Ukraine intensified.  A flight to quality ensued, with a selloff in equity markets and US Treasury yields plummeting on surging demand for safe haven assets.  Rates also declined this week after the FOMC minutes were released.  The Fed acknowledged elevated inflation risks and expected a rate hike “soon”, along with a faster pace of hikes than the last cycle if needed.  However, the minutes revealed a lack of detail around the size, number, and timing of rate hikes and the mechanics of balance sheet reduction, which the market perceived as slightly more dovish than expected.

The market digested a full economic calendar this week, largely reflecting healthy consumer spending and persistent inflationary pressures.  Retail sales rebounded in January with the most significant gain in ten months.  On a year-over-year basis, retail sales were up 13.0% in January versus up 16.9% in December.  On a month-over-month basis, retail sales beat expectations, rising 3.8% in January versus a 2.5% decline in December. Excluding vehicles and gas, retail sales were up 3.8% month-over-month.  Gains were broad-based with robust demand for goods, especially motor vehicles, home furnishings, and non-store merchandise.

January housing data were mixed.  Housing starts fell 4.1% in January, but building permits rose 0.7%, indicating a potential tailwind for future supply.  Existing home sales rose 6.7% in January to a 6.5 million annualized rate, exceeding market expectations.  Buyers were active in anticipation of rising mortgage rates, which constrained the supply of homes on the market to a record low of 1.6 months.

Although January data reflected gains, we believe manufacturing production likely remains constrained by supply chain bottlenecks.  While the industrial production index rose 4.1% and capacity utilization increased to 77.6% in January, gains were largely concentrated in utilities due to colder weather. 

The Conference Board’s Leading Economic Index (LEI) decreased 0.3% month-over-month in January, following a 0.7% downwardly revised increase in December. On a year-over-year basis, the LEI was up 7.3% in January versus up 8.3% in December. Omicron, rising prices, supply chain snags, and scarcity of labor all weighed on the index in January. The Conference Board expects GDP growth to moderate in the first quarter to 2.0%, but they are forecasting 3.5% growth for the full year.

In the near-term, we expect financial market volatility to remain elevated with heightened geopolitical risk, persistent inflation, and the Fed's pivot to less accommodative monetary policy.

Next Week:

S&P Case Shiller 20-City Home Price Index, Markit US Manufacturing PMI, Conference Board Consumer Confidence, Richmond Fed Manufacturing Index, Chicago Fed National Activity Index, GDP, New Home Sales, PCE, U of Michigan Consumer Sentiment

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© 2022 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.