5/13- Weekly Economic Highlights

Market volatility continued this week as investors absorbed new inflation data and the prospect of further rate hikes by the Federal Reserve in response.  U.S. consumer price increases exceeded consensus forecasts in April, while moderating slightly from March. The Consumer Price Index (CPI) was up 8.3% year-over-year in April, higher than the 8.1% consensus estimate but down from 8.5% year-over-year in March. Core CPI (CPI less food and energy) was up 6.2% in April, exceeding the consensus forecast of 6.0%, but down from a 6.5% year-over-year gain in March.  Data reflected a shift in spending from goods to services as the pandemic wanes, with shelter, food, airfares, and new vehicles contributing heavily to the increase.  The decline came primarily from a slight easing in gasoline prices, which have since surged again.  The Producer Price Index showed similar trends for April, with inflation moderating slightly, but less than market expectations. 

Inflation is weighing heavily on consumers.  The University of Michigan consumer sentiment index plunged more than forecast to 59.1 in preliminary May data from 65.2 in April, reaching its lowest level since 2011.  Consumers are concerned that wage inflation is not keeping up with broader inflation for goods and services.  Inflation expectations remained steady, with the 1-year inflation expectations measure unchanged at 5.4% and the 5-year inflation expectations measure at 3%.

According to the MBS mortgage application survey, the effective rate of a 30-year fixed rate mortgage rose to a new high of 5.74% percent this week.  Applications rose 2% this week but remain down about 50% from a year ago, with gains represented by homebuyers transitioning from fixed rate mortgages to adjustable-rate mortgages.

Equities continued to sell off this week, as investors pivoted to safer fixed income assets.  Markets rebounded somewhat at the end of the week as Fed Chair Powell reassured investors that more aggressive rate hikes are off the table in the short run.  As expected, the Senate voted to confirm Jerome Powell for a second four-year term as Federal Reserve chair. Yields finished lower across a flatter US Treasury curve, with the 2-year at 2.61%, 5-year at 2.89% and 10-year at 2.93% (as of Friday morning).  While US inflation may have approached a peak, elevated levels will likely persist, keeping the Federal Reserve on the path of monetary policy tightening in the near term.

Next Week:

Retail Sales, Industrial Production, Housing Starts, Existing Home Sales, Leading Economic Indicators

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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.