Nationwide Economic & Market Commentary

December 2, 2022 | Kathy Bostjancic

November employment report: Wage growth pops contrary to Fed wishes

  • The November employment report shows that the labor market remains very tight and notably wage gains exceeded expectations as average hourly earnings jumped 0.6%, following an upwardly revised 0.5% gain in October. The year-on-year pace accelerated from 4.9% to 5.1%, a reversal of the largely downward trend over the prior seven months. In the mix, wages for production and non-supervisory workers rose from 5.6% to 5.8% y/y, providing lower to medium-income workers a boost. 
  • The combination of the stronger-than-expected gain in November payrolls, up 261k, along with the pop in average hourly earnings indicates another healthy gain for personal income which should continue to fuel buoyant consumer spending during the holiday shopping season.
  • These data along with the reported upbeat consumer spending in October and signs of sturdy business investment indicate that economic activity has accelerated in Q4 to around 3% (annualized) in Q4.
  • The acceleration in wage growth will keep the Fed in a hawkish mood, though they are still poised to dial back the size of the rate hike to 50bps on December 14. However, the data suggest that the terminal policy rate will reach at least 5% in early 2023. The Fed has been clear that they want to see cooling in labor demand and wage growth in order for core services excluding rental prices to decelerate. 

The information provided by Nationwide Economics is general in nature and not intended as investment or economic advice, or a recommendation to buy or sell any security or adopt any investment strategy. Additionally, it does not take into account any specific investment objectives, tax and financial condition or particular needs of any specific person. The economic and market forecasts reflect our opinion as of the date of this report and are subject to change without notice. These forecasts show a broad range of possible outcomes. Because they are subject to high levels of uncertainty, they will not reflect actual performance. We obtained certain information from sources deemed reliable, but we do not guarantee its accuracy, completeness or fairness. Nationwide and the Nationwide N and Eagle are service marks of Nationwide Mutual Insurance Company. © 2022 Nationwide [NFM-22503AO]

 

November 10, 2022 | Kathy Bostjancic

Encouraging inflation readings, but not yet a trend

  • The October CPI readings encouragingly came in lower-than-expected, supporting the likelihood that the Fed dials back the size of the next rate increase to 50bps in December. However, one month’s results do not constitute a trend and the still elevated inflation rates will keep the Fed in a hawkish mindset. From an economic perspective, the combination of high inflation and interest rates will continue to pinch consumers’ wallets, forcing them to dip more into their pandemic-related savings and rely more on credit.
  • Overall inflation rose 0.4% in October, while core CPI increased a slightly slower 0.3%.  The ongoing climb in food prices (+0.6%) and resumed rise in gasoline prices (+4%) boosted the headline reading. On a year-ago basis headline CPI fell moderately to 7.7% from 8.2%, while core CPI eased modestly from a 40-year record pace of 6.6% to 6.3%.
  • A decline in core goods prices, -0.4%, marked just the second fall in goods prices since February 2021. From a year-ago core goods prices decelerated sharply to 5.1% from 6.6% in September as global demand weakens and supply chain stresses ease. This helped offset some of the continued upward pressure from core services prices. Core services inflation moderated posting a 0.5% rise in October, down from 0.8% in September. However, the year-on-year rate remains at 40-year high of 6.7%.  Within services, shelter costs rose a still strong 0.8% - the fastest monthly rise since August 1990. While owners’ equivalent rent increased a slower 0.6% vs 0.8% in September, hotel prices shot up 4.9%.  We look for residential rental costs to continue rise sharply as they lag home prices by about a year. 
  • Looking ahead, we forecast that inflation will only gradually ease as core services prices remain sticky. This will lead the Fed to maintain a very restrictive level for the policy rate throughout the year – we look for a terminal fed funds rate of 5.13%. The combination of high inflation, high interest rates, a dwindling amount of pandemic-related savings and a slowing in employment growth will eventually lead to a moderate economic recession by mid-year. However, the Fed is willing to err on the side of a recession to bring down inflation.

The information provided by Nationwide Economics is general in nature and not intended as investment or economic advice, or a recommendation to buy or sell any security or adopt any investment strategy. Additionally, it does not take into account any specific investment objectives, tax and financial condition or particular needs of any specific person. The economic and market forecasts reflect our opinion as of the date of this report and are subject to change without notice. These forecasts show a broad range of possible outcomes. Because they are subject to high levels of uncertainty, they will not reflect actual performance. We obtained certain information from sources deemed reliable, but we do not guarantee its accuracy, completeness or fairness. Nationwide and the Nationwide N and Eagle are service marks of Nationwide Mutual Insurance Company. © 2022 Nationwide [NFM-22503AO]

 

November 2, 2022 | Ben Ayers

Federal Reserve Meeting: Another Outsized Rate Move, Smaller Hikes Could Be On the Way:

  • The FOMC statement and comments from Chair Powell laid the groundwork for reduced rate hikes ahead, while still emphasizing that more work is needed to bring inflation back to trend. The cumulative rate hikes to date, however, have done little to slow inflation – given the lagged impact of monetary policy actions and the nature of the inflation surge itself. As such, the FOMC still has scope to raise rates at a sharp pace into 2023, if necessary, should core inflation continue to accelerate as it has in recent months. 
  • The FOMC announced an unprecedented fourth consecutive 75 basis point increase in November, bringing the federal funds rate up to the 3.75-4.00 percent range. While updated projections are not released in November, the FOMC estimates from September implied a further 50 basis point rise during the last meeting of the year in December. With core consumer prices surprising to the upside in August and September, we expect an increase of at least that magnitude following the December FOMC meeting.
  • But the Fed’s tightening cycle is likely to downshift at future meetings as the sharp tightening moves are working to slow demand and, thus, eventually prices. Housing market activity has plunged in response to the jump in interest rates, and it is likely that overall business conditions and hiring will decelerate over the next six months with lending costs rising so rapidly. Still, the federal funds rate should move above 4.00% in December and could climb towards 5.00% over 2023 depending upon the incoming inflation data.
  • While the apex for policy rates remains highly uncertain, Chair Powell stressed that interest rates are likely to stay high until the Fed is convinced that inflation is firmly moving towards its 2.0 percent goal. Most estimates show inflation moderately above-trend by year-end 2023, implying that rate cuts would not occur until 2024 or later even if the economy dips into a recession. This could mean an extended period of recessionary or weak economic conditions for the U.S. economy with a delayed easing response from the Fed.

The information provided by Nationwide Economics is general in nature and not intended as investment or economic advice, or a recommendation to buy or sell any security or adopt any investment strategy. Additionally, it does not take into account any specific investment objectives, tax and financial condition or particular needs of any specific person. The economic and market forecasts reflect our opinion as of the date of this report and are subject to change without notice. These forecasts show a broad range of possible outcomes. Because they are subject to high levels of uncertainty, they will not reflect actual performance. We obtained certain information from sources deemed reliable, but we do not guarantee its accuracy, completeness or fairness. Nationwide and the Nationwide N and Eagle are service marks of Nationwide Mutual Insurance Company. © 2022 Nationwide [NFM-22503AO]

October 7, 2022 | Mark Hackett

Equity Markets Commentary for October 7, 2022

  • Equity markets remain subject to emotional swings, with the S&P 500® Index gaining for just the second time in eight weeks. The S&P 500 has seen directional moves of greater than 1% in more than half of sessions this year, including seven of the past eight. Markets surged at the beginning of the week, with the first back-to-back gains of 2.5% since 2008 on hopes for a dovish pivot by the Fed, though that rally lost momentum by week’s end as those hopes faded.
  • Retail investors are showing signs of capitulation in the bond market, with EPFR data showing nearly $90 billion flowed into money market funds in the latest week, the highest level since April 2020. Investment-grade bonds saw their largest outflow in four months as investors react to unprecedented declines. Equity investors have been notably resilient, with modest inflows over the past four weeks, and $140 billion flowing into U.S. equity funds and ETFs this year.
  • This week’s rally on little news is a signal of the degree of bad news and pessimism that is priced into the market, and the potential for a relief rally at the sign of any shift in sentiment.


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