Inflation’s impact on the stock market
Stocks can generally act as a buffer against the long-term impacts of inflation.
Federal Open Market Committee (FOMC) members suggested last week that continued strong inflation data could lead the Fed to increase short-term rates at a faster pace than previously expected.
Mortgage rates continue to move higher with other longer-term rates, pushed up by expected Fed tightening and higher expected inflation.
New home sales fell again for February but remain at a solid pace.
Personal consumption expenditures (PCE) likely climbed due to an increase in spending on services (e.g., dining out) and fuel as Omicron subsided. With only a modest 0.3 percent gain for retail sales, we project growth in PCE of 0.6 percent. Lastly, February’s CPI suggests that consumer prices continued to climb for both goods and services, and we project growth in the core PCE price index (which strips out the volatile food and energy components) of 0.4 percent. This growth would bring the 12-month trend rate up 5.5 percent, the fastest since 1983.
With payrolls rising by more than 500,000 in seven of the past nine months, job gains probably slowed a bit, with an increase of 475,000 for March — still a very strong pace. With rising labor force participation, we look for the unemployment rate to remain steady at 3.8 percent. Additionally, February’s pause in average hourly earnings growth was likely more about the rise in hours worked following the drop in January due to Omicron than it was about slowing wage growth; as a result, we believe strong growth in wages resumed and we project growth in average hourly earnings of 0.4 percent.
Regional Fed manufacturing surveys were mostly up for March (with the Dallas Fed’s survey being released this week) and generally indicated continued growth in order backlogs and upward input price pressures. Additionally, growth in manufacturing new orders for February was at a five-month high, suggesting faster growth for the sector in the short run. Moreover, the flash manufacturing index from IHS Markit showed a strong gain. Taken together, we project a rise in the Institute for Supply Management (ISM) manufacturing index to 59.1 for March.
Federal Open Market Committee (FOMC) members suggested last week that continued strong inflation data could lead the Fed to increase short-term rates at a faster pace than previously expected. These comments caused interest rates to rise and flattened parts of the Treasury yield curve. Economic data were mixed, with new and pending home sales falling again while initial jobless claims fell to the lowest level since 1969.
With Omicron cases diminishing in the U.S., the service industry stands to make strong gains in 2022. This is welcome news to the economy, which has been hit by the pandemic, the Russian invasion of Ukraine, and high inflation. Nationwide’s Deputy Chief Economist Bryan Jordan and Senior Economist Ben Ayers provide their outlook on the economy in this post-Omicron phase and what sectors will benefit the most.