3/17 - Weekly Economic Highlights

Economic data this week including top tier inflation data was overshadowed by Silicon Valley Bank being placed in receivership reflective of financial stress in the U.S. regional banking sector as well as the global banking system when Credit Suisse, one of the biggest but troubled financial institutions in the world, was informed by its largest shareholder that it would not provide further equity capital support. Fortunately, both circumstances were addressed in an expeditious manner by their respective regulators. In the U.S., the Treasury department, Federal Reserve, and Federal Deposit Insurance Corporation jointly put policies in place to ensure bank deposit availability for individuals and corporations. U.S. Regulators also addressed pending liquidity concerns for the banking sector with the establishment of the Bank Term Funding Program, allowing banks to obtain liquidity from the Federal Reserve via pledging assets as collateral for cash as opposed to selling securities, assisting in alleviating bank balance sheet stress. Subsequent to the action taken by regulators in the U.S., the Swiss central bank stated on Wednesday it was going to provide financial support to Credit Suisse. The following day, Credit Suisse said it intended to borrow up to 50 billion Swiss Francs ($53.68 billion) through a covered loan facility and short-term liquidity facility but in spite of these regulatory actions, market confidence has yet to be restored. The recent financial stress when combined with getting inflation under control present a major challenge for the Fed in determining the appropriate path for monetary policy.

Although the aforementioned financial stress captured headlines this week, market participants and members of the Federal Open Market Committee were closely monitoring the economic data releases as well. This week’s top tier data focused on inflation both at the consumer and producer level. The Consumer Price Index (CPI) rose 0.4% in February versus the January reading of 0.5%, increasing 6.0% year-over-year, down from 6.4% in January. Core CPI, excluding the volatile food and energy components, increased to 0.5% in February and 5.5% on a year-over-year basis, decelerating from 5.6% in January. Shelter costs were the primary factor in the headline CPI representing 70% of the increase. Of note, used car prices experienced a significant drop of 13.6% when compared to a year ago, the largest decline since 1960. Inflation at the producer level declined below expectations in February. The Producer Price Index (PPI) decreased 0.1% last month and up 4.6% year-over-year down from 5.7% in January. Core PPI, excluding the volatile food and energy components, was unchanged in February and up 4.4% year-over-year. Overall PPI has slowed significantly on a year-over-year basis assisted by a broad-based decline in commodity prices and improving supply chains. Headline US retail sales fell in February, but prior months were revised higher. Notably the more granular control group reading of retail sales surprised to the upside at 0.5% month-over-month, compared to consensus expectations of a -0.3% month-over-month reading. The control group reading is thought of as a better indicator of consumer spending and points to the resilience of the US consumer. Sales at restaurants and bars fell 2.2% in February the most in a year but looking on the bright side, the March report might get a one-day boost on this St Patrick’s day. The Conference Board’s Leading Economic Index (LEI) remained in negative territory for the eleventh consecutive month at -0.3% in February, unchanged from the -0.3% in January. The LEI was down 6.5% year-over-year in February versus down 5.9% year-over-year in January. The consistent decline month-over-month continues to signal future contraction in the economy. The University of Michigan Consumer Sentiment index moved down to 63.4 in early March, lower than the survey of economist’s expectations and down from 67.0 in February. Consumer inflation expectations in March also moved lower; the 1-year measure was 3.8% in March down from 4.1% in February, and the 5-year measure moved slightly lower to 2.8% from the 2.9% in February.

The events of this past week have resulted in significant changes in market expectations for both Fed policy and future rate levels across the curve. Ten days ago, markets were pricing in a substantial chance of a 50-basis point increase at their March 22^nd meeting and the July 2023 futures contract was reflecting a peak rate of 5.61%. As of this morning, that same July contract is reflecting a rate of 4.55%. On the back of financial institution stress this week, Interest rates were extremely volatile. US Treasury rates decreased across the yield curve as the 2-year US Treasury note fell 0.60% to 3.99%, the 5-year decreased about 0.45% to 3.51% and the 10-year fell 0.30% to 3.40%. (as of this morning). The yield curve inversion decreased this week to approximately -0.55% between the 2-year and 10-year Treasury. Although the Fed will have to contend with concerns in the banking sector as well as the recent decision by the European Central Bank to hike 50 basis points, the Chandler team continues to believe when the FOMC evaluates the balance of risk at their meeting next week, the federal funds rate will likely be increased by another 25 basis points.

In the near term, our view is for capital markets to remain fluid and volatile across asset classes. Although recent examples of financial stress can result in heightened concerns, we will navigate through financial market volatility by maintaining our emphasis on risk management, and positioning portfolios appropriately for each respective strategy with a focus upon safety and liquidity.   

Next Week:

Philadelphia Fed Non-Manufacturing Activity, S&P Global Purchasing Managers Indices, Existing Home Sales, Federal Open Market Committee (FOMC) Rate Decision, Chicago Federal Reserve Bank National Activity Index, New Home Sales, Durable Goods Orders

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© 2023 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.