Professor Siegel's Weekly Commentary Archive
Economy Not Falling Apart Yet. Keyword: Yet.
April 17, 2023
The market hoped the Federal Reserve would see progress on inflation and pause, but Friday’s data releases and comments from Fed Governor Christopher Waller are cementing fears of yet another 25-basis point hike. The market currently estimates 80-90% odds of a one and done hike at the May 3rd meeting. Hopefully it will be the last but that is uncertain, and you all know I didn’t think we even needed the last hike.
Our team has calculated an alternative measure of Consumer Price Index (CPI) inflation substituting current housing data for the shelter component of CPI. This metric of inflation with current housing data has fallen precipitously. The average inflation rate over the last nine months using current housing data has been negative and brings the trailing 12 months inflation to 2.8% instead of the 5.0% widely reported and followed by the Fed. Back in June 2022, this inflation with current housing data was averaging 1.2% a month over the prior six months. Again, now it is negative. The Fed’s fight against inflation should be over.
Both the Producer Price Index (PPI) and CPI reports earlier in the week spawned hope the Fed would “get it.” Austan Goolsbee, the new Chicago Fed President also made comments on CNBC showing he believes we should pause (pending hot data in next three weeks) and we could have our first voting dissenter in more than a year at the May meeting. Goolsbee rightly pointed to banking stress leading to tighter lending standards. While he is skeptical of Torsten Slok’s call, this tightening is effectively 150 basis points of further hikes, he can see it being between 25-75 basis points of an impact. These tighter lending conditions are doing work on inflation for the Fed and the Fed doesn’t need to compound the slowdown any further with more rate hikes.
But retail sales data on Friday was not that weak. The headline number was weak but the details underneath were actually stronger than expected with healthy implications for real GDP growth. We had a drop in the manufacturing part of production which is more important than the industrial production because the industrial production includes utilities dependent on weather. However, there were positive revisions to some of the prior data so again there wasn’t much ongoing weakness on the economic front.
The big shocker was Friday’s announcement of one-year inflationary expectations from the University of Michigan Consumer Sentiment Survey which jumped from 3.7% to 4.6%. This jump is one of the biggest on record. Is that a data error? If not an error, the survey could have been taken shortly after OPEC announced the supply cut for oil and headlines pointing to higher gasoline prices could have creeped into this survey for inflation expectations in the short run. The long-term inflation estimates did not increase. Nonetheless, the overall consumer sentiment did increase more than expected.
Friday’s data basically indicates the economy is not falling apart yet, with yet being the keyword. The data likely emboldens the Fed to make another rate hike. Very little of the data we’ve seen yet incorporates the impact of the banking stress on the real economy, which will take more time to see.
Before the May Fed meeting, we will get the ISM Manufacturing Index reports and regional manufacturing reports. Philadelphia and New York come in earliest. We will get manufacturing ISM data May 1st. On the day of the Fed decision, we will get ISM Services data. But we will not get the next payroll report before the meeting—which comes two days after the decision. I don't know whether the Fed can get a partial glimpse at this data.
Stocks have rallied earlier in the week with some expectations for the Fed pivot. The market says ‘one and done.’ Again, I expect significant cuts later in the year when it becomes apparent how much damage has been done to the economy and official inflation data starts dropping more significantly.
We’ve had some positive seasonal support for the markets in April—one of better months historically. But we are not far from the time of year known as ‘Sell in May and Go Away.’ Could this be a cyclical top in the market—setting up what looks like a triple top in the S&P 500 from some technicians? If it does not breakthrough on a key Fed pivot, I can see some further pressure in the short run.
Friday’s big bank earnings reports tell us nothing about how the regional banks will fare from funding issues later this year. The bank walk towards higher yielding Treasuries and money market funds continues and will likely get another 25-basis point booster shot in a few weeks. For now, it remains prudent to have a cautious near-term outlook on stocks, but I’m still very bullish longer term.
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