4/07 - Weekly Economic Highlights

The Chandler team has been calling for positive, but below trend growth, in the first half of 2023 and in aggregate the data releases this week were supportive of the view. The ISM Manufacturing Index continues to face headwinds, coming in at 46.3 for March, compared to 47.7 in the prior month. This is the fifth month in a row with the index below 50.0, signaling contracting activity in the sector. The ISM Services Index also disappointed relative to recent trends with a reading for March of 51.2 compared to the prior months 55.1, but encouragingly still shows expansion in the sector. The Bureau of Labor Statistics updated the Job Openings and Labor Turnover Survey (JOLTS), which is reported with a one-month lag, and for the first time since May 2021 the number of job openings was below 10 million, signaling the tightening of financial conditions is starting to impact the labor market. In a further indication the labor market is not as tight as previously believed, the Department of Labor updated their seasonal factors for weekly unemployment insurance claims and the recent trends show a four-week moving average of 238k; prior to the revisions the four-week moving average was below 200k.

Despite some market angst on Thursday after the Jobless Claims revisions, this mornings’ March payrolls report was solid with the headline number coming in close to expectations at 236k and the three-month moving average a robust 345k. The unemployment rate remains very low at 3.5% with the labor force participation rate increasing by 0.1% to 62.6%, however the participation rate remains below the pre COVID reading of 63.3% as of February 2020. Average hourly earnings were up 0.3% on the month and 4.2% year-over-year, certainly moving in the right direction for policymakers but still elevated relative to the 2.0% inflation objective of the Federal Reserve. The Consumer Price Index (CPI) is set to be released on Wednesday, April 12^th – the consensus forecast calls for Core CPI to come in at +0.4% month-over-month and +5.6% year-over-year, indicating monetary policy needs to remain in restrictive territory.

Market participants and the Federal Reserve are maintaining very divergent views regarding the future trajectory of monetary policy. The current target range for the Fed Funds rate is 4.75% to 5.00%, however two-year Treasury notes are yielding just below 4.00%, and traded with a yield as low as 3.64% on Wednesday, April 5^th, signaling an expectation of an easing of rates in coming months. Given the totality of rate increases over the past twelve months, the cumulative impact of the shrinking of the Federal Reserve’s balance sheet via quantitative tightening, and finally the stress in the regional banking sector linked to the increase in interest rates, we believe the Federal Reserve should pause in their tightening campaign at either the May 3^rd or June 14^th FOMC meeting. Provided our forecast for positive but below trend growth comes to fruition we are forecasting the Fed Funds rate to remain in restrictive territory for the balance of 2023 with a fine tuning lower of the Fed Funds rate likely in 1Q 2024 as inflation trends downwards. The team expects interest rates to drift higher over the coming weeks as economic data softens, but does not roll over, allowing inflation to gradually migrate towards the 2% objective over an intermediate time horizon.

Next Week:

Consumer Price Index, FOMC Minutes, Producer Price Index, Retail Sales, Capacity Utilization, Industrial Production, and University of Michigan Consumer Sentiment.

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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.