Professor Siegel's Weekly Commentary Archive
Someone at the Fed is Paying Attention
August 14, 2023
The CPI and PPI came in extremely close to expectations and continue to show a moderation in inflation. Using our real time data for housing, the data are even better, with our measure of core CPI inflation utilizing real time housing data dropping to 1.5% from 1.7% last month year-over-year—while the official core CPI still prints at 4.7% driven by 7.7% shelter inflation. The San Francisco Fed wrote a paper on the trends in inflation that forecasts the official BLS shelter inflation could go negative later in 2024—confirming all that I have been saying of the biases in the official stats. It is good to see someone at the Fed is paying attention!
The PPI was a little hotter than expected but interestingly 40% of the increase came from a rise in asset management prices. The long-term trend is clearly for lower priced asset management solutions (like ETFs) gaining share at the expense of higher cost solutions. I would look for this datum to get revised down in the future.
The odds set in the Fed Funds Futures markets show a very low probability of a September increase in the Fed Funds Rate. The market is not giving up on a hike later in November, but we have a lot of time for the data to come in. The primary data to watch week to week is the jobless claims as the earliest indicator of softness in the labor market. We did have an unexpected jump there last week, but one week means little, especially in the summer. We will be looking closely this week.
We continue to have firmness in commodity prices. This removes one of the positive trends in inflation and might concern the Fed—although their primary focus is on the core numbers. Right now, the headline numbers are cooler than the core numbers, but that could reverse if recent trends hold with oil hitting the upper end of its range.
The economy remains strong, and we still don't see any deterioration in the economic reports. As we get through August and September, as people come back from their vacations and see the credit card debt has built up, sometimes we might see a cutback in spending. I don't think that would hit until late September.
I should also comment about labor costs—particularly with the outsized huge demands of the United Auto Workers (UAW) union. The demands from the UAW, if they're totally implemented, which is unlikely since it's a bargaining position, would be 10s of billions of dollars for those companies. Tesla is not a union shop, and the market weight of Tesla far exceeds the market share of Ford and GM in terms of how this impacts the S&P 500. But the UAW demands are symbolic of a trend we’ve discussed many times. Workers have fallen behind inflation. They did not have cost of living clauses and now are asking for a catchup in wages. Of course, they're pointing out the huge salaries of CEOs, but the big driver is to catch up to past unexpected inflation.
To overcome these higher wage costs, we will need to see better productivity. And here the data have come in quite well—just as I predicted it would. Better productivity trends are very positive for the economy. Even with a softening labor market, we could still get GDP growing at a rapid rate.
For the markets, I don’t see any motivation for major trend changes. Momentum is trending higher and likely to keep that way. There’s still some disbelief about a rally, which means it would keep going. Earnings came in very well for the second quarter, without any huge warnings about profit deterioration for the third quarter. The Nasdaq and higher priced stocks have faced some rotational pressures with the 10-year Treasury’s rise over 4%. That is natural and I believe the resilience of the market does favor value stocks. If we see those jobless games begin to rise significantly that will put a damper on any further rise.
There will be a lot more data before the September 20th meeting. But I think Powell is getting the message we don’t need to squeeze the economy much more to get inflation under control.
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