2/24 - Weekly Economic Highlights

The market digested top-tier economic data this week along with a hawkish tone reflected in the minutes from the Federal Reserve’s Open Market Committee meeting on February 1^st. Both the headline Personal Consumption Expenditures (PCE) Index and the Core PCE Index (excluding food and energy) accelerated more than expected in January, increasing 0.6% month-over-month. The headline index rose 5.4% and the core index 4.7% year-over-year, exceeding both last month’s increase and consensus expectations. Prices for both goods and services appreciated on a widespread basis. Expenditures on goods were led by motor vehicles and pharmaceuticals, while spending on services was led by rent and food services. The personal savings rate increased to 4.7%, to a seven-month high.

Robust retail sales and employment resulted in a strong gain in January's Chicago Fed National Activity Index, surging to 0.23 for the first positive report since last September. The University of Michigan Consumer Sentiment Index increased to 67.0 at the end of February, with both current situation and future expectations components demonstrating gains. Inflation expectations remained anchored with the 1-year expectation down slightly to 4.1% and the 5-year outlook remaining stable at 2.9%.

Also this week, the second estimate of fourth quarter 2022 GDP growth was revised downward to 2.7% from 2.9%. The revision lower was primarily due to weaker growth in personal consumption expenditures, driven largely by a decline in durable goods, and a wider trade gap in net exports.   Existing home sales weakened in January as mortgage rates resumed their upward climb. Sales of existing homes declined 0.7% to 4 million units. The contract rate for a 30-year fixed rate mortgage rose 32 basis points this week to 6.66%, according to Freddie Mac.

After a stellar January labor report, strong consumer spending, and higher than expected inflation, interest rate moves and the market consensus have converged with the Fed’s outlook for higher rates for a longer period. The 2-year treasury surged to 4.82%, the 5-year increased to 4.23%, and the 10-year rose to 3.96% (as of this morning). The inversion between the 2-year and the 10-year treasury widened to 86 basis points. The Chandler team continues to believe the Fed will continue to hike rates several times and maintain a higher terminal rate for an extended period until inflation reaches the Fed’s target range.

Next Week:

Durable Goods, S&P Case Shiller 20-City Home Price Index, Consumer Confidence, ISM, Pending Home Sales, S&P Global PMI

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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. The Chicago Fed National Activity Index is a monthly index designed to gauge overall economic activity and related inflationary pressure. The index is a weighted average of 85 indicators of national economic activity drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories. A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.