Global policy leaders met at the annual Jackson Hole Economic Symposium this week. Federal Reserve Chairman Jay Powell spoke at the conference this morning, striking a hawkish tone in comments widely anticipated by the market. Fed Chair Powell clearly articulated the Fed’s primary focus on bringing down inflation, while acknowledging that slower economic growth and a weaker labor market would result. He indicated that the economy and the labor market are strong; however, demand and supply are out of balance. Powell indicated that the Fed must continue raising rates and maintain restrictive monetary policy over time in order to achieve sustainable price stability. He reinforced the message that the September rate decision will be data dependent, but an “unusually large” rate hike could be appropriate. Fed Chair Powell also indicated that the Fed will be careful not to loosen financial conditions too soon, pushing back on market projections for easing next year.
Overall, key economic data was better than expected this week. According to the second estimate, U.S. GDP contracted less than originally reported, down -0.6% annualized in the second quarter, an improvement from the first estimate of -0.9%. The upturn reflected positive revisions for consumer spending and inventory investment. The consumer proved more resilient than expected as personal consumption expenditures were revised upward to 1.5% from 1.0% in the first reading.
Inflationary pressures eased in July. Personal Consumption Expenditures (PCE) fell 0.1% month-over-month in July after rising 1.0% in June. Year-over-year, the index was up 6.3% in July compared to a 6.8% increase in June. The improvement was better than the consensus estimate of a 6.4% year-over-year increase in July. The Core PCE deflator, the Fed’s preferred inflation gauge, was up only 0.1% month-over-month in July after a 0.6% gain in June. Core PCE was up 4.6% year-over-year in July, down from a 4.8% increase in June and better than an expected 4.7% gain. While the July results are a positive development, a one-month decline is not a trend. We believe the Fed will continue to employ more restrictive monetary policy until a sustainable improvement in inflationary conditions has been achieved.
Other economic data was mixed this week. On the constructive side, the Chicago Fed National Activity Index improved to 0.27 in July with positive indicators in all four categories. The University of Michigan Consumer Sentiment Index improved to 58.2 in August, reflecting better current conditions and substantially higher future expectations than last month. Inflation expectations came down to 4.8% for the year-ahead outlook and 2.9% for the 5-year outlook. Unfortunately, higher mortgage rates and elevated prices continued to hamper the housing market, as sales of new single-family homes fell 12.6% in July to 511,000. The manufacturing sector also continued its downward trend with the Richmond Fed Manufacturing Index down to -8 in August and the Kansas City Fed's composite index down to 3 in August from 13 in July.
Upon hawkish remarks from the Federal Reserve, equity markets faltered, and US Treasury rates extended their recent upward trend. The curve remained inverted, with 2-year at 3.42%, 5-year at 3.20%, and the 10-year Treasury at 3.04% as of this morning. We believe financial markets will remain volatile as the Federal Reserve raises rates to combat inflation and the economy experiences slower growth.
Next Week:
S&P Core Logic 20 City Home Price Index, Consumer Confidence, Chicago PMI, ISM Manufacturing, Payrolls
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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 rate. The Chicago Fed National Activity Index is a monthly index designed to gauge overall economic activity and related inflationary pressure. The index is a weighted average of 85 indicators of national economic activity drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories. A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.