Professor Siegel's Weekly Commentary Archive
Price and Inflation Data: All Measures are Very Encouraging
January 9, 2023
We closed last week with very positive moves in both the stock and bond markets after the key economic releases.
First, the employment report really surprised me. I thought we might see higher wage growth and a jobs number disappointment. Rather, the report was the exact reverse: a sharp moderation in wage growth, with a decline from 5.1% to 4.6% year over year—well below expectations—and also revisions downwards to prior months wage gains.
This sharp drop in wage pressures is what cheered the market most on Friday, as this impact on inflation is now a primary concern for the Fed. When the November jobs report was released a month ago, the market sold off on the fears the Fed would continue to be overly aggressive because of high wage growth.
For the second month in a row, and something that is quite rare, there was another drop in the average hours worked. Over the last two months we now have less total hours worked although we had over 200k jobs created each month. You usually do not get this type of drop in hours worked two months in a row outside of recessions.
Softness in the economy was echoed in a well below expected ISM services report, which dropped to 49.6 even though expectations for this was 55. The ISM Manufacturing level has been in contraction mode and below 50 for some time, but this was first recent report for ISM services indicating a contraction. Again, this is supportive of softening for wage pressures in services, as inflation in this sector of the economy is primarily wages based.
The broad U6 measure of unemployment dropped to an all-time low in the nearly 30-year history of the series. The labor force participate rate increased, bringing some workers off the sidelines and that also is positive for wage gain moderation.
The bottom line of all this price and inflation data: all measures are very encouraging and inflation is basically dead in my view. Commodities and natural gas prices in particular, have just plummeted with warmer weather. Gas prices are way off their highs.
What does this mean for the Fed? There is widespread expectation of a 25-basis point hike at the February 1st meeting. I reiterate I don’t think the Fed should do this hike, as the cumulative tightening is enough. But if the Consumer Price Index (CPI) and Producer Price Index (PPI) reports come in as I expect and softer, there is a chance the February hike is the last of this cycle.
The discount rate dropped dramatically, with the 10-year TIPS yield falling 10 basis points on Friday’s softer economic data—and that was another reason for the large gains in equities on Friday. I expect this trend to continue the rest of this year. I know many feel it is strange for the markets to rally on weaker economic data which implies lower earnings, but when participants fear an overly tight central bank, falling discount rates justifies market gains.
Many expect the Fed to stay tight because they see inflation staying elevated for longer. A key input to my inflation call was the growth in the money supply that has now fallen 2% over the last 8 months. Again, we want this money supply to grow 5% per year, so a 2% drop is a very sharp contraction. If the CPI were to have properly recorded the gains in housing in 2021 instead of having lags that will continue to bleed into the data this year, we are likely to have little inflation left.
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