Another booming employment report has the market considering a delay in rate cuts until September – but we think it increases the risk of no ease at all in 2024, and perhaps an increase! The federal funds curve still has a 99% chance of an ease in July, two by November 7 and three by January 29th, 2025. The consensus remains focused on inflation, and the chances that if prices preform like last year with smaller hikes from March through July, the FOMC will start the long- awaited path lower. However, it seems increasingly likely that a bounce in the second quarter, after a decent first quarter despite the January stall, will maintain real growth so far above potential that tightening comes back into play.
We agree with the GDPNow estimate of first quarter growth at 2.5% -- and see the third quarter as stronger, potentially well over 3%. The first quarter math currently has private sector hours worked at 1.0%, so 2.5% growth would imply 1.5% productivity growth, well in line with the recent and historical trend. Wage gains are running at a 4.4% annual rate in the first quarter, so unit labor costs should come in near 2.9% -- right at the pace of core inflation. Thus, margins remain excellent – which explains both the equity market’s performance and CEO’s continuing desire to hire.