4/8- Weekly Economic Highlights

Volatility across asset classes remains elevated as market participants continue to recalibrate expectations on the trajectory of monetary policy, the subsequent impact on asset valuations, and the overall impact to the domestic and global economy. The limited number of economic releases this week were generally positive, with the ISM Services index for March coming in at 58.3 compared to the prior month’s 56.6, remaining comfortably in expansionary territory. Initial Jobless Claims were also strong at only 166k, supporting the trends depicting a tight labor market. Consumer Credit for February, not typically considered a top tier economic release, came in at an extremely high $41.8 billion, perhaps the first indicator the excessive savings accumulated by consumers over the course of the pandemic is beginning to dissipate and impact consumer behavior.

The Federal Open Market Committee (FOMC) minutes from the March 16^th meeting were released this week with the FOMC telegraphing their plans to continue to remove policy accommodation via increasing the Fed Funds rate and beginning to implement their plans to shrink the size of the Federal Reserve’s balance sheet. The indicated pace of balance sheet reduction was moderately higher than base case expectations, with the FOMC indicated a $95 billion cap for asset purchase runoff ($60 billion in Treasury securities and $35 billion in mortgage-backed securities) likely to be formally announced at the May 4 FOMC meeting. Contracting the size of the Federal Reserve’s balance sheet is effectively a tightening of monetary policy and could potentially serve to keep the pace of the Fed Funds increases measured considering the year-to-date adjustment in Treasury yields. Notably the higher-than-expected pace of balance sheet reduction helped to steepen the Treasury yield curve on a week over week basis. The current spread between the two year Treasury note and the ten year Treasury note is in excess of twenty-one basis points compared to the negative eight basis points on April 1^st, a net twenty-nine basis point move over the course of the week. Mortgage rates have also moved materially higher since the beginning of the year, with conventional thirty year loans in the 5% area, which we believe will impact the housing market and potentially consumer behavior later in the year.

 Next week the market will digest multiple top-tier economic data points. The Consumer Price Index will be released on Tuesday and the Producer Price Index on Wednesday, both readings will be uncomfortably high for market participants and policymakers, but this is a known fact and already incorporated into market prices and monetary policy expectations. Retail Sales will be released on Thursday; the Chandler team will be scrutinizing the data closely for indications of softening consumer behavior linked to the increase in interest rates, negative year to date equity returns, and the beginnings of tightening financial conditions. Consensus expectations for 2022 GDP growth remain above trend at 3.3% according to Bloomberg, but notably the forecast continues to tick lower as financial conditions adjust tighter. The Chandler team expects monetary policy to tighten and accommodation to be removed over the course of the next several FOMC meetings until the elevated inflation metrics begin to improve. The adjustment thus far in interest rates and financial conditions will ultimately impact the trajectory of inflation, however, the magnitude and pace of the ultimate moderation in inflation is highly uncertain. 

Next Week:

CPI, PPI, Retail Sales, University of Michigan Sentiment, Empire Manufacturing, and Industrial Production.

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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.