4/19 - Market Recap: Mixed Economic Data Amidst Geopolitical Tensions

Markets began the week with a muted reaction to escalating Middle East tensions with Iran’s retaliatory attack on Israel last weekend. Although the majority of drones and missiles were intercepted, concerns of retaliation hovered over the market throughout the week. Of note, crude oil prices declined on Monday and continued to fall even after Israel responded on Thursday evening with what is being defined as a “limited missile strike”. For the foreseeable future, elevated geopolitical risks will be a factor to consider as we navigate the path forward weighing the heightened global risks as well as the incoming economic data.

Retail sales increased 0.7% for the month, considerably higher than consensus expectations of 0.4%. A 2.1% rise in gas prices along with a 2.7% increase in online sales were two primary factors in the higher number. The US consumer continues to buoy an economy under pressure from higher interest rates and sticky inflation, despite growing credit card debt, higher delinquencies, and a declining savings rate.

Assisted by a larger-than-expected increase in factory output, US industrial production rose 0.4% in March but declined at an annual rate of 1.8% in the first quarter. Capacity utilization moved up to 78.4% in March, remaining 1.2% below its long run (1972-2013) average. 

Housing data this week reflected the impact of higher mortgage rates and elevated home prices. US Existing home sales decreased 4.3% from the prior month. Housing starts on a month-over-month basis were down 14.7% and building permits dropped 4.3%, both were significantly below expectations and are indicative of declining home builder optimism. 

Initial jobless claims remained steady at 212,000, and in line with the median forecast of Bloomberg economists at 215,000. Continuing claims also changed little from the prior week at 1.81 million. Both remain consistent with a strong job market. In contrast to continued strength in labor markets, the index of leading economic indicators dropped 0.3% in March after registering the first increase in two years the prior month. Primary factors for the decline include weaker business orders, lower consumer confidence and fewer building permits. 

In comments made on Tuesday, Fed Chair Jerome Powell stated that inflation has not moved quickly enough towards the central bank’s goal. Inclusive of New York Fed President John Williams, additional Fed officials have recently messaged a willingness to be patient before cutting rates. As such, near term rate cuts are becoming a lower probability. At Chandler, we contend that a summer rate cut is still likely with further cuts dependent on the incoming data.

After a week of mixed economic data and significant geopolitical events, both short and longer-term treasury rates are higher. Two-year Treasury yields opened the week at 4.88% and are currently trading at 4.98%. On the longer end of the curve, the 10-year started the week at 4.50% and is currently trading at 4.62%. Next week we will be closely watching Personal Consumption Expenditure (PCE) data for March as this is the Fed’s preferred inflation gauge. After consecutive months of elevated inflation data, the market will be focused on the release to see if the new paradigm of “higher for longer” has additional support.
 

Chicago Fed National Activity Index (CFNAI), Philadelphia Fed Non-Manufacturing, S&P Global Manufacturing PMI, S&P Global Services PMI, New Home Sales, Pending Home Sales, Richmond Fed, Durable Goods, Jobless Claims, GDP Q1, Personal Consumption Expenditures (PCE), University of Michigan Consumer Sentiment

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