7/21 - Weekly Economic Highlights

Economic data remained resilient this week, further solidifying the market’s expectation for another 25 basis point hike to the Federal Funds rate next week at the July 26th Federal Open Market Committee (FOMC) meeting, which would bring the target range to 5.25% to 5.50%. Headline retail sales for June came in modestly below expectations at 0.2% month-over-month compared to consensus expectations of 0.5%, but the ‘control group,’ which removes food services, gas, building materials, and auto and other motor vehicle dealers, surprised to the upside at 0.6% versus consensus expectations of 0.3%. On a year-over-year basis, the retail sales control group is up 3.8% compared to headline retail sales being up 1.5% year-over-year as of June 2023. The control group data feeds into the Bureau of Economic Analysis estimate of Gross Domestic Product (GDP), and with the second quarter advance estimate set to be released next week, expectations for a material economic slowdown linked to the tightening of financial conditions continue to get pushed out into 2024. Coincident economic data points to a very gradual slowing, with the four week moving average on weekly jobless claims down to 238k compared to the prior week’s 247k reading, but comfortably above the year end 2022 four week moving average of 209k. Continuing jobless claims are inching higher to 1,754k compared to the prior week’s 1,721k, and above the year end 2022 reading of 1,645k.

Treasury benchmark interest rates drifted higher this week partially linked to constructive second quarter earnings reports as well as next week’s FOMC meeting. In particular, the bank earnings released thus far in the second quarter have been viewed positively by market participants, with several large US banks issuing debt earlier in the week at reasonable valuations, indicating investor confidence in the sector. The stress in the regional banking sector has dissipated, but has not gone away, as investors continue to question the resiliency of their business models in the face of a rising Fed Funds rate and the inverted yield curve. The FOMC meeting concludes on Wednesday, July 26th, and although another increase in the Fed Funds rate is all but assured, the policy statement and press conference by Fed Chair Powell following the meeting will be closely scrutinized by investors. The Chandler economic forecast calls for slower aggregate growth in the second half of the year and the team is concerned about the implications of the FOMC continuing to tighten financial conditions with inflation moderating and the Fed Funds rate in restrictive territory. In our view, the risk of a more damaging and material economic slowdown will increase if the FOMC is not able to pause in their tightening campaign soon.

Chicago Fed National Activity Index, S&P Global Manufacturing, Philly Fed, S&P Core Logic Home Price Index, Consumer Confidence, 2Q GDP advance report, Durable Goods, Employment Cost Index, Personal Income, Personal Spending, and PCE Inflation.

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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.