5/12 - Weekly Economic Highlights

Following last week’s Federal Open Market Committee Meeting on May 3^rd the most anticipated economic release of the week was the April Consumer Price Index (CPI). Both the headline and core (excluding food and energy) came in right on top of consensus expectations at 0.4% month-over-month. The year-over-year CPI numbers remain elevated at 4.9% for the headline and 5.5% for core, however, the ‘base effect,’ with an extremely high monthly number from May and June of 2022 rolling out of the index, will assist in improving the optics of inflation moderating in the coming months. The Chandler team continues to forecast inflation will move lower but will be challenged to migrate all the way down to the 2% policy objective over an intermediate time horizon. The Producer Price Index was also updated this week for April and the trends are encouraging; both headline and core came in at 0.2% month-over-month with the year-over-year numbers at 2.3% for the headline and 3.2% for core. The other notable economic release from the Chandler team’s perspective was weekly jobless claims breaching 250k to a slightly elevated 264k for the week ending May 5^th. The team will be analyzing the evolution of the jobless claims data closely; if jobless claims move sustainably above the 250k threshold it will be another affirmation the tightening of financial conditions is having the desired impact in helping to slow down the economy.

President Biden, House Speaker McCarthy, as well as leadership from the Senate met earlier this week to discuss the debt ceiling. Although no formal progress was noted, news reports indicate staff from both the Democratic and Republican parties are meeting behind closed doors to identify areas of compromise so the legislation can move forward, which is encouraging. Treasury Secretary Yellen has been warning the ‘X’ date, when the US Treasury could be in a position to not be able to meet all its financial obligations, could be as soon as early June. The Treasury Bill market is taking notice of Treasury Secretary Yellen’s warning, with T-Bill yields jumping higher, well above 5%, in early June, compared to the below 4% yields in late May. The Chandler team expects negotiations on increasing the debt ceiling to remain fluid with legislation ultimately being passed to increase the limit and enable the United States to continue to meet its financial obligations.

The Chandler team continues to forecast positive but below trend growth over the course of 2023. Financial conditions have clearly tightened and are having the desired impact of slowing down the velocity of the economy. We believe inflation will move lower but not with a pace and magnitude to justify a quick pivot by the Federal Reserve to lower policy rates early in the second half of 2023. The Chandler base case continues to look for the Federal Reserve to pause and hold its policy rate at the current range of 5.00% to 5.25% for the balance of 2023, putting downward pressure on economic growth and inflation.

Next Week:

Retail Sales, Industrial Production, Capacity Utilization, Housing Starts, Philly Fed, Existing Home Sales, and Leading Economic Indicators.

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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.