June 26, 2026
Resilient economic data releases over the past two weeks and the output from the June 17th Federal Reserve Open Market Committee (FOMC) meeting are serving to solidify the Chandler market outlook for the go forward six months. Despite elevated energy prices on a year-to-date basis and heightened volatility across commodity prices in general, oil prices (West Texas Intermediate) are trending lower and below $70/barrel, well off the highs of just over $100/barrel on May 18th but above the end of year price of around $57/barrel. Notably, the feared negative implications to the strength of the US consumer correlated with higher commodity prices have yet to appear. Both the Consumer Price Index (CPI) and the Personal Consumption Expenditures Index (PCE) are uncomfortably high at the headline level, but on a core basis, which excludes food and energy, there has yet to be a material enough pass through to cause market angst on the trajectory of inflation. Encouragingly, market based measure of inflation remain contained, and have drifted lower over the quarter, with the 10 Year Treasury Inflation Protection Security Break Even inflation spread down to 2.20% compared to year-to-date high spread of 2.52% on May 4th.
Retail Sales for May were released on June 17 and came in at levels above consensus expectations and consistent with the resilient consumer theme. The headline number was 0.9% and the control group number, which excludes autos, gas, and building materials, was up 0.7% for the month, both 0.3% higher than the consensus estimates. The control group number is a strong proxy for spending on consumer goods and feeds into GDP estimates, supportive of plus 2% GDP growth estimates in the second quarter (first quarter GDP was updated this week to 2.1%, compared to the prior 1.6% estimate). Coincident indicators on the employment backdrop remain constructive. The four week moving average on weekly jobless claims as of June 19 remains stable at 224k and the most recent Automatic Data Processing (ADP) four week moving average on the net change in jobs on a week-over-week basis was 30.75k. The Bureau of Economic Analysis provided their May estimates for personal income, personal spending, and PCE inflation on Thursday. Personal income and personal spending were both strong numbers, at 0.7% month-over-month for each, while headline PCE inflation was 0.4% for the month and core PCE inflation was 0.3%. On a year-over-year basis PCE headline inflation is 4.1%, the highest annualized inflation rate since April 2023, while core PCE on an annualize basis is 3.4%, the highest inflation rate since October 2023. Energy prices are clearly influencing the recent firm inflation numbers however we are forecasting the annualized numbers to stabilize and gradually migrate toward the 2% policy objective provided the recent move lower in commodity prices holds.
The FOMC met on June 17 and provided the initial update on what to expect from the leadership of new Fed Chair Kevin Warsh. The initial market reaction was hawkish, as market participants increased the probability the Fed Funds rate would be increased in the current calendar year after the meeting, based on updates to the press release following the meeting, the updated Summary of Economic Projections (SEP), and the tone of Fed Chair Warsh at the press conference. The updated press release was shortened considerably, emphasized the Committee will deliver price stability, and lacked forward guidance. The SEP increased the central tendency on the forecast for both headline and core PCE inflation in 2026 and 2027, with larger forecasted increases in the current year. The projected appropriate policy path for the Fed Funds rate also increased by 50 basis points in 2026, removing any probability of a reduction in the Fed Funds rate within the forecast, and marginally increased the central tendency forecasts in 2027, 2028, and over the longer run. Fed Chair Warsh, a longtime skeptic of forward guidance, did not submit any forecasts. In the press conference following the meeting, Fed Chair Warsh noted in his personal view forward guidance was not well suited for the current environment and emphasized he encouraged his colleagues to submit SEP forecast even though he declined to do so. During the press conference the Chair also announced the formation of five tasks forces focused on Fed communication, the Fed’s balance sheet, the use and reliance on existing data sources, productivity and jobs, and the inflation framework. Other potential changes to how the Fed will operate were also foreshadowed, focused on less direct communication to market participants.
The Chandler team’s outlook calls for monetary policy to remain stable over our six month forecast horizon. Despite the updated inflation forecasts embedded in the Federal Reserve’s SEP, we remain focused on the longer term trajectory of core inflation, market based measures of inflation, and the health of the US consumer. Based on our internal outlook for the path of core inflation over the balance of the calendar year, we believe core PCE inflation on an annualized basis will end the year between 3.1% to 3.4%, implying the current Fed Funds target rate of 3.50% to 3.75% is appropriate. Market based measures of inflation remain contained, and have moderated of late, supporting our view that the current stance of policy is appropriate. We also believe the formation of the five task forces at the Federal Reserve will provide some flexibility for policy to remain stable until their conclusion at the end of the year, provided inflation remains within a reasonable range. Since the conclusion of the FOMC meeting last week, Treasury yields have moved lower across all maturity tenors, supporting our internal view the initial hawkish reaction to the FOMC meeting was misplaced. Regarding the health of the US consumer, although the savings rate is lower than we would prefer, with the most recent reading at 3.0%, the backdrop of stable home prices and the solid performance of invested assets has been supportive of consumer spending. The tailwinds from the fiscal stimulus are going to start to fade along with the short-term pick up in domestic economic activity from the World Cup, implying we should observe some moderation in economic strength late in the 3rd quarter and into the fourth quarter of the calendar year. Next week the markets are closed on Friday, July 3, for the July 4th holiday, however the monthly employment report will be released early on Thursday, July 2. We expect the report to be consistent with current trends, implying solid payroll growth, a low unemployment rate, and wage growth consistent with the Fed’s 2% policy objective.
Next Week:(holiday-shortened by the Independence Day market closure observed Friday, July 3): Dallas Fed Manufacturing Activity, FHFA House Price Index, S&P Cotality Case-Shiller Home Price Index, MNI Chicago PMI, Conference Board Consumer Confidence, JOLTS Job Openings, Challenger Job Cuts, ADP Employment Change, S&P Global U.S. Manufacturing PMI, ISM Manufacturing, Construction Spending, June Employment Report (Nonfarm Payrolls, Unemployment Rate, Average Hourly Earnings), Initial Jobless Claims, Factory Orders, Durable Goods Orders.
Written by William Dennehy II, CFA, Co-Chief Investment Officer