Geopolitical risk and the escalating Russia invasion of Ukraine continues to heavily influence market pricing. Financial conditions are beginning to tighten with investment grade credit spreads moving wider, elevated new issue concession in the primary market, and decreasing liquidity with wider bid/ask spreads across the fixed income universe. Equity markets are also experiencing volatility and downward price pressure as the supply/demand imbalances in the energy sector become more acute as the geopolitical situation worsens in the short term, clouding the outlook for above trend growth in 2022. The Chandler team expects the heightened volatility and challenging markets to persist until market participants get more visibility on the ultimate outcome of the Ukraine crisis.
Economic data releases were generally constructive this week with the ISM Manufacturing and ISM Services Index remaining comfortably in expansion territory (above 50.0), although the ISM Services release was below consensus expectations and lower than the prior month coming in at 56.5 in February compared to 59.9 in January. The non-farm payrolls report, released this morning, was strong. The number came in well above expectations at 678k with upward revisions from the prior months totaling 92k. The three-month moving average payrolls is 556k, very close to the six-month moving average of 570k, signaling trends in employment remain robust. The Bureau of Labor Statistics noted in its press release accompanying the report that job growth was widespread, led by gains in leisure and hospitality, professional and business services, health care, and construction. The decline in Omicron cases helped to marginally improve the participation rate, which increased to 62.3%, still below the February 2020 level of 63.4%, but moving in the right direction. Average Hourly Earnings also surprised, coming in unchanged on the month compared to January’s revised 0.6 increase, moving the year over year number on Average Hourly Earnings to 5.1% in February compared to 5.5% in January. As more participants enter the labor force, wage inflation dynamics should start to moderate, helping to lower the current elevated inflation readings.
Despite the elevated geopolitical risk and tightening financial conditions we still expect the Federal Reserve to tighten monetary policy at the upcoming March 16th Federal Open Market Committee meeting. The Chandler team is forecasting a ¼ point increase in the Federal Funds rate with additional increases in the coming months as well as a passive reduction in the Federal Reserve Balance sheet to commence in the Q2 2022. We believe the geopolitical tensions in the market will allow the Federal Reserve to be ‘measured’ in their response to removing policy accommodation in the first half of the year. The recent uptick in the price of oil and energy prices overall further complicates the policy response from the Federal Reserve, but ultimately the Chandler team believes inflation metrics will moderate in the 2nd half of 2022, allowing the Federal Reserve to remove policy accommodation but not increase the Fed Funds into restrictive territory.
Next Week:
Consumer Credit, JOLTS Job Openings, CPI, and University of Michigan Sentiment 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.