Professor Siegel's Weekly Commentary Archive
Friday’s Employment Report was a True Shocker
February 6, 2023
Friday’s employment report was a true shocker. Markets responded by reversing current trends. Friday saw higher bond yields, a higher dollar, and a pullback in the surge in high duration growth stocks.
The January jobs data was incredibly strong: over 500,000 new jobs, but importantly a three-tenths surge in hours worked—which matches the biggest increase seen in hours worked in over 25 years. If productivity remained unchanged in January, this would correspond to a 15% annualized growth in GDP in January, clearly a level which cannot be sustained. Despite this report, GDP in the first quarter is estimated by most economists to grow only 1% or 1.5%. Is it possible productivity collapsed again, as it did in record amount in the first quarter of last year? Only time will tell, but I would not be surprised to see some reversal in February data, potentially leading to a drop in payroll and a decrease in hours worked next month.
The service sector data came in strong on Friday after it had a surprising fall last month. Most thought the fall in services was consistent with manufacturing PMIs which are still in contraction mode. Even with the bounce back, the service sector is in very modest expansion mode.
Earlier in the week we had the Fed meeting, and the markets cheered Powell’s dovish tone—or at least no signs from Powell pushing back on the loosening of financial conditions in the stock and bond markets.
Powell stated a couple more 25 basis point interest rate hikes are appropriate, and he emphasized the importance of using the core inflation rate minus shelter in evaluating inflation trends. I am glad Powell recognized that the government housing data is distorted and cannot be used to judge inflation in that sector.
Powell is now focused on core services inflation-ex housing—which measures inflation in services that include financial services, health care, transportation, recreation, and utilities. Powell is looking for a ‘narrative to emerge’ on the trends in these sectors but these are very slow-moving pricing sectors of the economy. I hope he does not wait too long for this narrative to become clear to him to halt the increase in rates.
Unfortunately for risk markets, the strong jobs report gives ammunition to the hawks as the tightening of policy is not yet hurting employment—and that creates pressure for equity markets the longer the Fed keeps rates elevated.
On Friday, we saw markets trade down on a combination of soft earnings reports from the big tech companies plus the resurgence of bond yields following the strong jobs report. On January 2, I predicted that the equity markets would rally 15% and the 10-year bond yield to drop 50-100 basis points over the course of 2023. We received much of that prediction just in January. We might give some of that back in the short run until a pivot in Fed policy becomes clearer.
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