6/17- Weekly Economic Highlights

Market volatility escalated this week as the Federal Open Market Committee reacted to persistently high inflation with a move to tighten monetary policy.  The Fed raised the target rate by 75 basis points, the greatest increase since 1994, to a range of 1.50% - 1.75%.  Fed Chair Powell indicated the committee may raise rates again at the next meeting by 50 or 75 basis points and continue to tighten as needed to dampen inflation.  Kansas City Fed President Esther George was the only dissenter who preferred a 50 basis-point hike, which surprised the market due to her hawkish history.  Statement language indicated that the Fed remains “committed” to the long-run inflation target of approximately 2%.  Dot plot projections rose significantly from March, with the median fed funds target rate at 3.4% by the end of this year and 3.8% in 2023.  The Fed reiterated the plan to wind down its balance sheet by $47 billion per month beginning this month, increasing to $95 billion per month in September.  The committee also downgraded their economic outlook from March, projecting Personal Consumption Expenditures (PCE) at 5.2%, Core PCE at 4.3%, Unemployment at 3.7%, and GDP growth at 1.7% this year.  They view the economy as strong, but likely to cool later this year with tightening conditions. 

Central banks around the globe are battling inflation and following the trend toward tighter monetary policy.  The Bank of England tightened for the fifth straight meeting by 0.25% to 1.25% while projecting peak inflation just above 11%, and the Swiss National Bank also surprisingly hiked rates by 50 basis points.  Inflationary pressures in Europe have been exacerbated by the ongoing war between Russia and Ukraine.

Economic data this week revealed softening trends.  Retail sales fell 0.3% in May, the first decline in five months, primarily due to a significant decline in auto sales.  Excluding automobile and gasoline sales, retail sales rose just 0.1% in May.  The report suggests softer demand for goods amid high inflation and a shift to services such as travel and entertainment.  Retail sales growth is at risk as consumers dip into savings and assume more debt, and discretionary spending is likely to be negatively impacted by high gasoline and food prices.

The Producer Price Index (PPI) came in at elevated levels consistent with last week’s Consumer Price Index report, providing further support for the Fed’s decision to raise the target rate by 75 basis points.  PPI rose 0.8% in May and increased 10.8% year-over-year. The core index, excluding food and energy, rose 0.7% month-over-month and 9.7% year-over-year.  Although decelerating slightly on a year-over-year basis, costs remain difficult for producers to absorb and are likely to be passed on to the consumer.  Housing starts fell 14.4% in May to 1.549 million units and dropped 3.5% year-over-year.  Permits were also down 7% in May to 1.695 million.  As expected, rapidly rising mortgage rates have reduced home affordability and priced some buyers out of the market.  Leading Economic Indicators fell 0.4% in May, for the third consecutive monthly decline. The report signaled declining economic activity driven by poor equity market performance, a slower housing market, and weak consumer expectations.  Industrial Production slowed to 0.2% growth in May from 1.4% in April, and Capacity Utilization stayed relatively steady at 79%.

Rates continued their march upward this week and the curve flattened, with the 2-year treasury up 11 basis points to 3.17%, the 5-year up 8 basis points to 3.34%, and the 10-year up 7 basis points to 3.23% (as of this morning).   We believe market volatility is likely to continue as central banks tighten monetary policy to combat inflation, the economy begins to decelerate, and geopolitical risk remains elevated. 

Next Week:

Chicago Fed National Activity Index, Existing Home Sales, S&P Global PMI, Kansas City Fed Manufacturing Activity, New Home Sales, University of Michigan Consumer Sentiment

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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.