Summer camp for central bankers
Weekly Bond Commentary
Relatively subdued markets waited all week for some guidance from the Federal Reserve. In the meantime, economic data offered positives and negatives, with neither edging ahead of the other.
Consumers continue to feel confident, but higher mortgage rates are biting into housing activity. The University of Michigan Consumer Sentiment index reflected a small pull-back in confidence, on both weaker current and future conditions and slightly higher inflation expectations. Encouragingly, though, the lowest share of consumers since October 2021 expects income growth to be exceeded by inflation in the year ahead. Weekly jobless claims unexpectedly fell, from 240,000 to 230,000, enabling consumers to continue spending. The 30-year fixed-rate mortgage reached its highest level since 2001, at 7.23%, boosted by ongoing economic strength keeping upward pressure on rates. That, and the low inventory of unsold homes, has frustrated consumers who otherwise may buy a home. Durable goods orders in July fell, but excluding volatile transportation orders they actually rose from 0.2% to 0.5%.
At the Fed’s Jackson Hole economic symposium (summer camp for central bankers!), Chair Powell spoke for quite a bit longer than his very short speech last year, but his commitment to lowering inflation to the Fed’s 2% target was the same. Powell highlighted many of the same themes as he has in the pasts, noting the economy has made good progress in reducing goods inflation but less for housing and non-housing services inflation (think health care, transportation and accommodations). This last component accounts for over half of the core Consumer Price Index (that strips out volatile food and energy costs), and was less affected by supply chain bottlenecks and rising interest rates, keeping it stubbornly high.
Powell made it clear the Fed will not change its policy outlook until it sees progress in this inflation piece, which will likely require a period of below-trend economic growth as well as some softening in labor market conditions. Several more important economic data releases arrive before the Fed’s next policy meeting on September 20, which the Fed and the markets will, as usual, watch closely.