Nationwide Economic & Market Commentary

April 10, 2024 | Kathy Bostjancic

CPI remains too hot to bolster confidence

  • The buoyant advance in inflation in March pours cold water on the view that the faster readings in January and February simply represented start of the new year price increases that were not likely to persist. The lack of moderation in inflation will undermine Fed officials’ confidence that inflation is on a sustainable course back to 2% and likely delays rate cuts to September at the earliest and could push off rate reductions to next year. 
  • Core services prices continue to remain sticky and be the key upward driving force for inflation. On the month, core services prices rose another 0.5%, matching the same gain in February. The year-on-year pace accelerated to 5.4% from 5.2% in February. In the details, housing rental costs increased another 0.4%, transportation costs increased a strong 1.5%, and medical care services rose a rapid 0.6%.
  • The super core reading (core excluding rents) popped 0.6% higher in March and the 3-month annualized rate accelerated to a hot 8%, up from 6.8% in February. The year-on-year rate rose to 4.9% from 4.4% -- way too hot for the Fed.
  • One positive reading, Core goods prices fell back 0.2% on the month, but provides just a modest offset to the still strong increase in services prices.
  • At the headline level, the 1.7% rise in gasoline prices came in line with expectations, building upon the 3.8% rise in February. While a volatile measure, higher gas prices weigh on consumer sentiment.
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. © 2024 Nationwide [NFM-22503AO]

 

April 5, 2024 | Kathy Bostjancic

Employment continues to defy all expectations

  • The strong and broad-based pace of job creation in March topped all estimates and underscores the Fed will be in no hurry to start cutting interest rates. However, as Chairman Powell has indicated, the robust increase in employment will not preclude an easing of monetary policy since in part it reflects an increase in labor supply. If inflation readings moderate as we forecast, we still see the Fed cutting rates starting in July.
  • The year-on-year rate for average hourly earnings continues to moderate gradually, slowing to 4.1%. While still a bit above the rate consistent with 2% inflation, the cooling in the pace of wages in the face of strong hiring highlights that the rise in immigrant workers is adding to the labor supply.
  • The combination of the re-acceleration in job gains and sturdy monthly rise in wages will continue to underpin strong consumer spending. Prior to the March employment report, we estimated that real GDP growth in Q1 was 2.2% (annualized), but the robust strength in the labor market readings provides upside potential to our forecast.
  • The large gap between employment levels recorded in the household and establishment non-farm surveys narrowed as household employment posted a sizeable 498K rise, outstripping even the strong 303K jump in the establishment payroll count.
  • The unemployment rate held steady at 3.8%, but that was due to an influx of new workers into the labor force as the labor participation rate rose 0.2 ppts to 62.7%.
  • The March rise in non-farm payrolls of 303K is well above the prior 12-month average of 231K and matches the recent high posted in May 2023.
  • In the details, leisure and hospitality employment rose 49K in March, returning to its February 2020 pre-pandemic level.
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. © 2024 Nationwide [NFM-22503AO]

 

March 20, 2024 | Kathy Bostjancic

Fed maintains three rate cuts in 2024, but higher path in 2025 and beyond

  • The FOMC’s median interest rate forecast continues to call for three 25bps rate reductions in 2024. This comports with our view that the Fed will start to cut rates by the summer.  We see a June rate cut being on the table, but odds are rising that the Fed waits until July to start its easing process. We see the FOMC cutting rates three times, reducing the target range for the Fed funds rate by 75bps to 4.5% - 4.75%.
  • However, Fed officials lifted their median rate forecasts for 2025 and beyond. For 2025 the median estimate rises to 3.9% from 3.6%, in  2026 it increases to 3.1% from 2.9%, and nudged up the long-run neutral fed funds rate projection to 2.6% from 2.5%. The rise in the long-run neutral rate is mild, but underscores an growing view that the neutral rate is higher than previously thought. The FOMC kept the median long-run potential real GDP growth rate at 1.8%, so that implies the FOMC sees mildly stronger inflationary pressures going forward that require a slightly higher policy rate to keep actual inflation at the 2% target.
  • On the inflation front, marking to incoming data, they nudged up their core PCE inflation forecast to 2.6% from 2.4% for this year, but continue to see inflation gradually slowing to 2.2% by 2025 and reaching the 2% target by 2026.
  • For GDP, again marking to current data, they lifted the growth estimate for this year to 2.1% from 1.4% previously, and modestly lifted 2025 to 2% from 1.8% and to 2% from 1.9% in 2026 reflecting increasing resiliency in the economy.
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. © 2024 Nationwide [NFM-22503AO]