6/2 - Weekly Economic Highlights

The US House and Senate successfully passed legislation this week to suspend the US debt ceiling and establish spending caps until after the 2024 election. The bill, negotiated by President Biden and House Speaker Kevin McCarthy, is expected to be signed into law by President Biden as early as today. The vote on the bill was supported by moderates from both parties who had reservations about certain aspects of the deal but believed that avoiding a default was crucial. The resolution of the debt ceiling reassured investors, leading to a rally in the stock market, while Treasury yields rose in response to the strong labor report released this morning.

The latest US jobs report showed mixed signals regarding the state of the labor market. On one hand, there were stronger-than-expected payroll gains in May, with nonfarm payrolls increasing by 339,000, following an upwardly revised gain of 294,000 in April. The job gains were observed in various sectors, including skilled services, construction, transportation, warehousing, and social assistance. However, there was also a decline in household employment, which led to a higher unemployment rate of 3.7% in May compared to 3.5% in April. Additionally, hourly earnings moderated, and average hours worked per week slightly decreased. These conflicting data points suggest some uncertainty in assessing the overall health of the labor market.

In March, the US housing market experienced a decline in prices compared to the previous year, as indicated by the S&P/Case-Shiller 20-City Home Price Index. The index showed a year-over-year decrease of 1.15%, marking the first decline since May 2012. Among the 20 cities surveyed, Seattle (-12.4%), San Francisco (-11.2%), and San Diego (-5.3%) reported the largest declines in housing prices. Conversely, Miami (7.7%), Tampa (4.8%), and Charlotte (4.7%) saw the highest annual gains in housing prices. Challenges such as higher mortgage rates and overall affordability continue to impact the housing market.

US consumer confidence fell to a six-month low in May, reflecting concerns about the current state of the labor market and business conditions. The confidence gauge remains below pre-pandemic levels, and respondents' expectations of more employment opportunities in the next six months have decreased. Manufacturing activity, as indicated by the Dallas Fed Manufacturing and MNI Chicago PMI Report, showed contraction and declined at a faster pace in May. US factory activity has now shrunk for the seventh consecutive month, with orders contracting and material costs experiencing the largest decline in nearly a year. These indicators suggest ongoing challenges in manufacturing actively while inflationary pressures continue to trend lower.

Although the strong labor report drove yields higher this morning, for the week, yields on US Treasury securities moved lower. The 2-year Treasury fell by 11 basis points to 4.45% after starting the week at 4.56%, and the 10-year is down 14 basis points to 3.65% as of Friday morning. Additionally, the yield inversion between the 2-year and 10-year Treasury widened from last week, ending the week at approximately 80 basis points. Market participants will focus on economic data regarding the health of the services sector, as well as any additional information from officials at the Federal Reserve regarding the direction of monetary policy at their upcoming meeting on June 14th. Although there are signs of economic resilience, the Federal Reserve is likely to be approaching a pause in its hiking cycle, and the Federal Open Market Committee (FOMC) is expected to maintain flexibility based on incoming data.

Next Week:

S&P Global US Services PMI, Factory Orders, Durable Goods Orders, Institute of Supply Manage (ISM) Services Index

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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. The S&P CoreLogic Case-Shiller home price index tracks monthly changes in the value of residential real estate in 20 metropolitan regions across the nation.