3/11- Weekly Economic Highlights

Unfortunately, there was a continued escalation of hostilities in eastern Europe this week with unimageable human tragedies unfolding on a daily basis as a result of Russia’s invasion of Ukraine. On the economic front, the war will primarily affect the US and global economy through increases in commodity prices, and elevated supply-chain disruptions. Governments across the globe have placed tough economic sanctions on Russia, including the US banning Russian oil imports. Additionally, numerous companies have recently exited the Russian market to try to persuade the Russian government to stop its incursion into Ukraine, which has contributed to significant financial market volatility.

The Consumer Price Index headlined the economic data releases this week and although U.S. consumer prices were in line with expectations, inflation hit a 40-year high. The Consumer Price Index (CPI) was up 7.9% year-over-year in February, versus a 7.5% year-over-year gain in January. Core CPI (CPI less food and energy) was up 6.4% year-over-year in February, versus up 6.0% in January. Rising food and rent prices were primary contributors to the big increase as well as the month-end surge in gas prices which is likely to be even more pronounced in the March report. Pricing pressures are likely to increase in coming months considering the recent surge in commodity prices, but it’s important to keep in mind that even before Russia’s invasion of Ukraine, consumer prices were rising at a pace not seen for decades. Although we believe pricing pressures will likely remain elevated longer than anticipated as a result of the conflict in Europe, our base case outlook for the Fed has not changed. We expect the Fed to tighten monetary policy by 25 basis points at their meeting next week with additional increases in the coming months. The Fed has very little margin for error as it attempts to combat inflation without pushing the economy into a recession.  If inflation consistently moves higher, led by energy prices it might force the Fed to be more aggressive, but the geopolitical situation adds significant uncertainty. A longer than expected conflict followed by lower consumer sentiment, slower than expected growth, and declining real wages might force the Fed to exercise greater caution later this year and evokes the “R” word (recession) in longer term economic outlook discussions. Nevertheless, we believe it is too early to predict an economic downturn in the U.S.

Additional labor data this week reflected U.S. job openings (Job Openings and Labor Turnover Survey – “JOLTS”) dropped slightly in January to 11.3 million but remained close to historical highs and was higher than the median estimate of Bloomberg economists at 10.95 million. The University of Michigan released their consumer sentiment index for the month of March; the index fell from a reading of 62.8 in February to 59.7, the lowest since 2011 as higher inflation continues to weigh on consumers. For the coming year, consumers expect an inflation rate of 5.4%, up from last month’s reading of 4.9%. The report reflected the highest-ever share of Americans expecting their finances to worsen in the coming year as higher prices begin to have a negative effect on real incomes.

Although recently relegated to smaller font headlines due to the war between Russia and Ukraine, it’s important to note the COVID-19 trend data continues to improve both in the U.S. as well as globally. The notable exceptions are China and Australia where new cases have increased over the past two weeks. We continue to believe high levels of consumer savings along with improvement in the health situation and a strong labor market should continue to provide positive news in a difficult global environment.

Next Week:

Producer Price Index, Retail Sales, FOMC Meeting, Industrial Production Housing Starts & Permits, Philly Fed, Existing Home Sales, Leading Indicators  

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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.