6/10- Weekly Economic Highlights

Financial market participants continued to assess the impact of higher energy prices and new inflation data on the economy and the future path of interest rates this week. US inflation data was worse than expected in May, hitting a 40-year high with broad based price increases for most goods and services. The consumer price index (CPI) increased 1.0% for the month of May and 8.6% from a year earlier with shelter, food, and gasoline as the largest contributors. The core CPI, which removes more volatile food and energy components, rose 0.6% in May and 6.0% from a year earlier. Persistently elevated levels of inflation are likely to keep the Federal Reserve (Fed) on the path of tightening monetary policy. The most recent inflation data suggests that the Fed is all but certain to hike the federal funds rate 0.50% at its June 15, 2022 meeting.

Like the Fed, the European Central Bank (ECB), the central bank for the nineteen countries that use the euro, signaled it will hike interest rates next month for the first time since 2011 followed by a potentially larger move in September if inflation does not subside. They will also end their bond purchases on July 1, 2022, an action the Fed took starting on June 1 of this year. These actions signal a shift in the bank’s monetary policy to combat inflationary pressures. Inflation in Europe is running at an annual rate of 8.1%, which is complicated further by the invasion of Ukraine by Russia and the continuing war.

Inflationary pressures continue to weigh heavily on consumer sentiment. The University of Michigan’s preliminary June sentiment index fell to 50.2 from 58.4 in May. Inflation expectations moved higher with 46% of respondents attributing their negative views to continuing price pressures and only 13% of respondents expect their incomes to rise more than inflation. Respondents expect inflation to rise 5.4% over the next year, up from 5.3% a month earlier, and expect prices to increase 3.3% over the next five to ten years, up from 3.0% in May.

With the negative tone of the data, financial markets weakened toward the end of the week as investors continued to evaluate the impact of inflation on the economy and corporate profits. Leading up to the CPI report stocks and bonds were weaker and continued to weaken after the release of the CPI data. Yields across the US Treasury curve moved higher, with the 2-year at 3.03%, 5-year at 3.25%, and 10-year at 3.17% (as of Friday morning). The effective rate of a 30-year fixed rate mortgage rose to 5.58% this week. Housing data next week will provide important insight on the housing market and whether higher mortgage rates are having a negative impact on building permits and housing starts. Financial markets remain volatile and are likely to stay that way in the near term as global central banks transition their policies to combat inflationary pressures.

Next Week:

NFIB Small Business Optimism, Empire Manufacturing, Retail Sales, Producer Prices, Federal Open Market Committee Meeting (FOMC), Building Permits, Housing Starts, Industrial Production, and Leading Economic Index

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© 2022 Chandler Asset Management, Inc. An Independent Registered Investment Adviser. Data source: Bloomberg and Federal Reserve. 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.