Elevated market volatility continued over the past two weeks and US Treasury rates moved significantly higher with the 2-year US Treasury note up 34 basis points closing on Thursday at 2.74%, the 5-year up 33 basis points at 3.02%, and the 10-year up 23 basis points at 2.95%. According to a Freddie Mac survey, mortgage rates increased for the 7th consecutive week with the average rate on 30-year fixed rate mortgages now above 5%.
Although U.S. consumer prices rose less than expected in March, inflation remained elevated at a 40-year high. The Consumer Price Index (CPI) was up 8.5% year-over-year in March, versus up 7.9% year-over-year in February. Core CPI (CPI less food and energy) was up 6.5% year-over-year in March, versus up 6.4% year-over-year in February. Gasoline costs drove about half of the monthly increase, while the food was also a sizable contributor. Used vehicle prices declined (although remaining firm), resulting in lower than forecast core increases for the month. Current inflation readings continue to run well above the Fed’s longer-run target of around 2.0%. While gas prices have started to decline in recent weeks in part due to COVID lockdowns in China, we believe pricing pressures may remain elevated longer than anticipated as a result of the conflict in Europe. Retail sales edged higher in March, but there are signs that higher gas prices are impacting discretionary spending. On a year-over-year basis, retail sales were up 6.9% in March versus up 18.2% in February. On a month-over-month basis, retail sales moderated, rising 0.5% in March versus an upwardly revised increase of 0.8% in February. Excluding vehicles and gas, retail sales were up just 0.2% month-over-month. Gains in March were driven primarily by gasoline purchases, while e-commerce and vehicle sales declined. The University of Michigan released their consumer sentiment index for the month of April; the index unexpectedly jumped to 65.7 from a reading of 59.4 in March, the lowest since 2011. For the coming year, consumers expect an inflation rate of 5.4%, unchanged from last month’s reading.
Turning attention to this week’s housing data, March's housing starts rose 0.3 percent to 1.793 million annual rate, exceeding survey expectations of 1.74 million, Housing starts were up 3.9 percent from a year ago. Existing home sales declined 2.7% in March to an annualized rate of 5.77 million units. The pace of sales is 4.5 percent below the 6.04 million units sold in March 2021. The significant increase in mortgage interest rates along with low inventories are resulting in slower sales activity. Although sales are slowing, it doesn’t mean upward pressure on housing prices has abated. The median price of an existing home rose 4.5 percent month-over-month in March to $375,300, a record high and up 15.0% compared to one year ago. The data released by the National Association of Realtors noted that sales were down in the lower price ranges, suggesting first-time buyers are having trouble finding affordable entry-level housing as well as qualifying for a mortgage while sales for higher priced homes remained strong.
In the U.S. and globally, Covid trend data continues to improve but China’s lockdowns and pursuit of a zero Covid policy have resulted in significant congestion and backlogs around Shanghai, the home of the largest port in the world. This situation along with the war in Ukraine is adding significant stress to already strained global supply chains. Primarily due to the Russia-Ukraine war, the International Monetary Fund (IMF) reduced their global growth forecast for 2022 to 3.6% GDP, representing a 0.8% reduction from its forecast released in January.
The Leading Economic Indicators Index (LEI) was up 0.3% in March as expected but February doubled from the prior reading of 0.3% to 0.6%, suggesting continued expansion in spite of the headwinds of the war, weakening consumer and business sentiment, and market volatility.
As we move closer to the next Fed meeting early next month, Chandler’s view is that the Fed will continue to tighten at its May and June meetings, and the likelihood of a 50-basis point increase at one or possibly both meetings has risen substantially. On Thursday, Fed Chair Powell participated in a panel hosted by the IMF where he was joined by European Central Bank President Christine Lagarde. At this last scheduled public appearance before the next FOMC meeting, Chair Powell stated that aggressive rate hikes are possible and specifically stated “50 basis points will be on the table for the May meeting.” Although Chandler believes sequential rate hikes are likely to occur in the near term, monetary policy is not on a pre-set course and the cadence and magnitude of rate hikes in the second half of this year will be dependent on how economic and geopolitical conditions evolve.
Next Week:
Chicago Fed National Activity Index, Durable Goods Orders, S&P CoreLogic Case-Shiller 20-City Home Price Index, Consumer Confidence, New Home Sales.
Copyright © 2022. All Rights Reserved.
© 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.