8/12- Weekly Economic Highlights

Inflation reports this week indicated the possibility of easing price pressures with both the CPI and PPI coming in below expectations. The consumer price index (CPI) decelerated from a four decade high to 8.5% on a year-over-year basis and was flat month-over-month after rising 25 consecutive months. In conjunction with a 4.6% drop in energy prices, the average price of gasoline fell 7.7% in July. Unfortunately, some underlying inflation pressures remain as food prices remained stubbornly high up 1.1% in July after a 1.0% increase in June. The core CPI, which removes more volatile food and energy components, rose 0.3% and 5.9% from a year earlier. The elevated cost of shelter, the largest component of this category was up 0.5% for the month and 5.7% for the year. Consistent with the Consumer Price Index report, the Producer Price Index (PPI) came in lower-than-expected as PPI declined 0.5% in July and increased 9.8% year-over-year, down from 11.3% reported in June. The core index, excluding food and energy, rose 0.2% month-over-month and 7.6% year-over-year. Although supply chain issues continue to improve and commodity prices including oil are down from their highs in June, labor costs, the war in Ukraine, and COVID lockdowns in China will continue to pose risks for continued price relief.

Primarily driven by higher expectations about the economy and personal finances, the University of Michigan’s sentiment index rose to a three-month high of 55.1 from 51.5 in July. The sentiment index measure of future expectations was up as well to 54.9 from 47.3. Respondents expect inflation to rise 5.0% over the next year, down from 5.2% a month earlier, and expect prices to increase 3.0% over the next five to ten years, up slightly from 2.9% in July. Economic theory presumes that an expected acceleration of future inflation alone will cause actual inflation to accelerate. Thus, if the consumer believes prices will increase substantially in the near future, they will purchase goods and services now which causes those prices to rise faster in the near term more than they otherwise would.

Short-dated Treasury yields moved slightly lower this week. The 2-year Treasury is down 3 basis points to 3.24% after starting the week at 3.27%, and the 10-year is up 7 basis points to 2.85% as of Friday morning. The yield inversion between the 2-year and 10-year treasury decreased by 10 basis points to the current 39 basis point differential. We believe market volatility will remain elevated as the Fed seeks to tighten monetary policy at pace to combat inflation without sending the U.S. into a recession which has historically proven to be a very difficult task.

U.S stocks were mixed this week as the market digested corporate earnings mostly better than feared and a potentially hawkish Federal Reserve. Treasury yields trended higher on hawkish remarks from Fed governors and the robust employment report. The Treasury curve inverted further, with the 2-year at 3.21%, 5-year at 2.96%, and 10-year at 2.84% as of Friday morning. According to Freddie Mac, mortgage rates fell below 5% for the first time in almost four months, as the average for a 30-year fixed loan fell to 4.99% from 5.30% last week. Financial markets remain volatile as the power struggle between inflationary pressures and a slowdown in economic growth weighs on market participants.

Applicable to both the inflation data this week as well as last week’s strong employment report, it’s always important to look at trends in the data versus a single “strong” or “weak” economic data point. Focusing on trends in the data will be of the utmost importance with the release of the Personal Consumption Expenditures (PCE) report later this month as well as another CPI report to digest before the next Fed meeting concluding on September 21st. Irrespective of the softer inflation data this week, the Chandler team expects monetary policy accommodation will continue to be removed until persistent inflation subsides.

Next Week:

Building Permits, Housing Stats, Existing Home Sales, Industrial Production, Retail Sales, FOMC Meeting Minutes, PhiladelphiaFed, Leading Indicators

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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.