9/22 - Weekly Economic Highlights

The Federal Reserve (Fed) opted to maintain its key policy rate, the federal funds rate, within the range of 5.25% to 5.5% this week. Nonetheless, the Fed conveyed a consensus view that another rate hike is possible later in the year, along with its commitment to keeping rates at their current level until inflation subsides closer to its 2% target, endorsing a 'higher-for-longer' strategy. The Fed’s summary of economic projections also revealed expectations of higher economic growth, reduced unemployment, and a gradual easing of inflation compared to earlier forecasts. Consequently, bond yields increased, while stocks declined following the Fed’s announcement, reflecting investor assessments of the potential for additional rate hikes and an extended period of higher interest rates.

In September, the National Association of Home Builders/Wells Fargo index fell 5 points to 45, indicating homebuilder sentiment reached a five-month low. Rising mortgage rates deterred potential buyers from entering the housing market, prompting builders to offer incentives to attract buyers. The lack of housing affordability was evident in August's housing construction sector, which recorded its lowest activity level since June 2020, with residential housing starts declining by 11.3% to a 1.28 million annualized rate. However, there was an uptick in applications for building permits, growing at the fastest pace since October. Despite challenges in the housing sector, the labor market remains robust, as applications for US unemployment benefits hit their lowest level since January, providing stability to the broader economy.

Bond yields experienced upward pressure this week following comments from the Federal Reserve. The 2-year US Treasury yield increased by 8 basis points, reaching 5.12%. Similarly, the 5-year yield rose by 13 basis points, reaching 4.59%, while the 10-year yield climbed by 14 basis points, reaching 4.47% as of this morning. Notably, the yield curve remains inverted, with the spread between the 10-year and 2-year US Treasury yields narrowing to approximately -64 basis points from -70 basis points at the end of the previous week.

Next week, financial market participants will process a wealth of economic data, including Personal Consumption Expenditures (PCE), an important gauge of inflation. Moving forward, participants will closely monitor signs of inflation aligning with the Federal Reserve's expectations, as well as any delayed or future rate hike impacts on sectors like housing. Any material deviation from the Federal Reserve's expectations will likely result in increased volatility for financial markets.

Chicago Fed Nat Activity Index, Dallas Fed Manf. Activity, Philadelphia Fed Non-Manufacturing Activity, S&P CoreLogic 20-City Home Price Index, New Home Sales, Conf. Board Consumer Confidence, Richmond Fed Manufacturing Index, Dallas Fed Services Activity, Durable Goods Orders, Personal Consumption Expenditures Index (PCE), Pending Home Sales, Kansas City Fed Manf. Activity, MNI Chicago PMI, University of Michigan Sentiment, Kansas City Fed Services Activity

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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.