5/6- Weekly Economic Highlights

Financial markets remained volatile this week after digesting the actions of the Federal Open Market Committee (FOMC). The FOMC announced it would raise the federal funds rate by 0.50% to a range of 0.75%- 1.00% and begin shrinking its $9 trillion balance sheet starting June 1st.  The FOMC will initially reduce its balance sheet by $47.5 billion, increasing to $95 billion per month after three months with a combination of US Treasury, agency debt, and agency mortgage-backed securities. Federal Reserve Chair Powell took steam out of market speculation that the Fed would further ratchet up its pace of tightening by saying “a 75 basis point increase is not something the committee is actively considering,” which provided a catalyst for lower short term rates in the near term.

Chandler’s view is the Federal Reserve (Fed) will continue to tighten monetary policy at its June and July meetings, with the possibility of a 0.50% increase at one or both meetings. 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 timing and magnitude of rate hikes in the second half of this year will be dependent on how economic and geopolitical conditions continue to transpire.

The US Treasury yield curve steepened this week, as interest rates on longer dated maturities increased. The 2-year Treasury note yield this morning was down 0.06% for the week at 2.67%, while the 10-year increase 0.10% to 3.08%. The interest rate on conventional 30-year fixed rate mortgages moved higher to 5.27% this week according to a Freddie Mac survey. Interest rates across sectors continue to feel the effects of tighter monetary policy.

Economic data was mixed this week. The labor market remains strong and added 428,000 jobs in April. The unemployment rate was unchanged at 3.6% and average hourly earnings rose 5.5% year-over-year in April, slightly lower than the 5.6% reading in March. Job growth was widespread, led by gains in leisure and hospitality, manufacturing, and transportation and warehousing. Durable goods and factory orders showed strength coming in better than expected. Meanwhile, the ISM manufacturing and services purchasing managers indices (PMI) were weaker than expected but still pointed toward future growth. Next week, market participants and policy makers will shift their focus to inflation data to gauge whether inflation is showing signs of abating.

Next Week:

NFIB Small Business Optimism Index, Consumer Price Index (CPI), Producer Price Index (PPI), University of Michigan Consumer Sentiment Index 

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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.