7/15- Weekly Economic Highlights

The market received reports on inflation this week surpassing expectations, likely increasing the pressure on the Federal Reserve to act more aggressively to combat rising prices. Although our base case scenario remains a 75-basis point increase at the next Fed meeting on July 27^th, the possibility of a full percentage point increase has become a higher probability considering the latest inflation data. The consumer price index (CPI) increased 1.3% for the month of June, and 9.1%% from a year earlier with gasoline, shelter, and food as the largest contributors. The 9.1% year over year reading was the highest reading since November of 1981. The core CPI, which removes more volatile food and energy components, rose 0.7% and 5.9% from a year earlier. Consistent with the Consumer Price Index report, the Producer Price Index (PPI) came in higher-than-expected providing further support for the Fed to continue their path forward of tightening monetary policy.  PPI rose 1.1% in June and increased 11.3% year-over-year. The core index, excluding food and energy, rose 0.4% month-over-month and 8.2% year-over-year. On the positive side, the 8.2% year-over-year gain was the smallest since last November and many producers are beginning to experience some price relief as commodity prices have declined recently inclusive of oil, wheat, copper, and corn. Earlier this week, The Bank of Canada made a surprise move by raising interest rates by a full percentage point. Similar to US policy makers, many Canadian Central Bank Governors are worried that inflation running at a four-decade high is becoming entrenched.

In addition to the inflation data this week, US retail sales climbed by more than forecast. Retail sales increased 1.0% in June, after an upwardly revised 0.1% decline in May.  Excluding automobile and gasoline sales, retail sales rose 1.0% in June.  The report suggests the consumer might be more resilient than expected despite the highest inflation in four decades. As always, it’s important to look at trends versus a single economic data point, upcoming consumer data will be watched closely to see if the consumer can keep up their resilience in the face of significantly higher prices. In addition, retail sales numbers are not inflation adjusted, an important consideration when analyzing the data. Gasoline was up 3.6% in June following 5.6% in May, and gas prices reached highs in mid-June followed by lower prices to begin the month of July. Assuming lower gas prices remain intact, these lower prices on a relative basis will be reflected in the upcoming data. Moving forward, we continue to believe that retail sales growth is at risk as consumers continue to dip into savings and issume more debt.

The University of Michigan’s sentiment index rose to 51.1 from 50 in June, but the sentiment index measure of future expectations declined to 47.3, the lowest number since 1980. Respondents expect inflation to rise 5.2% over the next year, down slightly from 5.3% a month earlier, and expect prices to increase 2.8% over the next five to ten years, down from 3.1% in May.

Market volatility, a constant theme over the past few months continued this week. The 2-year treasury is up 3 basis points to 3.10% after hitting a weekly high of 3.16%, and the 10-year is down 10 basis points to 2.90% (as of this morning). The yield inversion between the 2-year and 10-year treasury increased by 10 basis points to the current 20 basis point differential. We believe market volatility will continue as central banks tighten monetary policy to combat inflation, the economy begins to decelerate, and geopolitical risks remain elevated. 

Next Week:

Housing Starts, Existing Home Sales, Philadelphia Fed, Leading Indicators

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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.