9/29 - Weekly Economic Highlights

Longer term Treasury yields migrated higher on a week-over-week basis as market participants continue to ‘price in’ a higher for longer narrative on restrictive monetary policy settings from the Federal Reserve. The adjustment in the shape of the yield curve over the course of the week was also significant, with the degree of inversion between the two year and ten year Treasury note becoming less inverted, currently at -49 basis points, compared to -68 basis points at the end of last week. The adjustment in yields was driven more by the ten year Treasury, which moved higher by 13 basis points, to a yield of 4.56%, compared to the two year Treasury note, which moved lower by 6 basis points to a yield of 5.05% (as of the time of this writing). Higher longer term interest rates will continue to reverberate through the economy and in Chandler’s view further tighten financial conditions and gradually exacerbate the pressure on the more interest rate sensitive sectors of the economy.

Economic data releases this week were mixed with both bullish and bearish investors observing data releases to support their respective outlooks. Consumer Confidence disappointed, coming in at 103.0, versus the consensus estimate of 105.5 and the prior months 106.1, which was revised down from the original release of 108.7. The expectations portions of the release also disappointed, coming in at 73.7 compared to the prior month’s 80.2. Given the totality of the change in interest rates and the subsequent impact to the economy the Chandler team believes Consumer Confidence indicators will face headwinds in coming months. Weekly jobless claims remain exceptionally resilient, coming in at 204k this week, with the four week moving average at 211k; jobless claims would need to deteriorate in coming months to put downward pressure on wage inflation to provide a catalyst for the Federal Reserve to eventually meet its 2% inflation objective. The second quarter GDP release showed slightly less robust growth of 2.1% compared to the prior estimate of 2.3% but still above estimates of trend growth. This morning the Personal Income and Personal Spending data releases for August came in close to expectations at 0.4% month over month. The Personal Consumption Expenditures (PCE) inflation data were also released this morning and were a modest positive for the overall outlook, with the headline number coming in at 0.4% compared to expectations of 0.5% month over month, reflecting the increase in commodity prices, and the critical core number coming in at 0.1% compared to the consensus estimate of 0.2%. The elevated core inflation prints from August through October of 2022 will continue to roll out of the year-over-year numbers, with PCE core inflation annualized at 3.9% currently poised to migrate to around 3.5%, or possibly lower, by year end.

Absent a last minute compromise, the US government is expected to shut down this weekend. Given the progress made by the US Senate on a continuing resolution to keep the government open, we believe the shutdown is likely to be relatively short, but nonetheless will have implications for the visibility on the trajectory of the economy. The first week of the month is a critical week for top tier economic data, with the ISM Manufacturing and ISM Services data released on the first and third business days of the month, and the critical payrolls report released on the first Friday of every month. If the government is shutdown, the payrolls report may be delayed, which will add to the level of uncertainty about the monetary policy outlook at this critical juncture. The Chandler team continues to forecast the tightening of financial conditions will continue to negatively impact the future trajectory of the economy with below trend growth more likely in the first half of 2024 compared to the more robust growth trends of the first half of 2023.

ISM Manufacturing, JOLTS, ISM Services, ADP Employment, and Payrolls

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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.