Professor Siegel's Weekly Commentary Archive
Battle in Market Dynamics
July 10, 2023
It was a big week for jobs data last Thursday and Friday—with whipsaws in equities on Thursday and Friday but also a breakout higher in bond yields on the underlying strength in the economy.
The ADP jobs data—and very large beat—sent the 10-year yield well above 4%, leading to losses in equities on Thursday for fears the Fed would keep up its tightening regime. One of those perverse cases of ‘good news for the economy, bad news for the equity markets.' But the payrolls report on Friday scored points for both the hawks and the doves at the Fed.
The Friday jobs report was on the weaker side—coming in a bit below expectations but also included 110,000 in lowered revisions for the prior 2 months.
For the hawks, there was higher than expected wage gains, and a tick up in the average hours worked. Last month we noted a 1/10th tick down in average hours which essentially nullified all the jobs gained last month; but this month we regained that 1/10th of an hour, so it amplifies the job gains. The unemployment rate also ticked down to 3.6% as well, which was expected. What was unexpected was the broader unemployment rate (referred to as the U-6 measure) which ticked up to 6.9%.
Clearly there are more hawks than doves at the Fed, even though I still believe the Fed should pause hikes and monitor the cumulative impact of the tightening already in place. The Fed needs to only look back at its own experience calling inflation transitory to see how long it could take for inflation to turn around—and once a weakening in the economy kicks in, it could come fast.
We still have a number of weeks before the July Fed decision. This week we will get the CPI data, which will be important. We have two more initial jobless claims, which have stabilized at a higher level. Sensitive commodity markets have also stabilized and should not feed into higher inflationary pressures.
The economy looks like it is progressing smoothly, with a resilient consumer impervious to the impact of higher borrowing costs. It is the ‘YOLO’ (you only live once) consumer out traveling and enjoying the summer. But also, this could be one of the last good stretches for the economy before the summer ends and credit card bills come due—then we go back to school and September to October have been times of some dicey periods for the markets. I reiterate it is a mistake for the Fed to see the job market turn down significantly before they stop hiking and start easing.
The money supply increased last month—part of it being a reflow of deposits back into the banking system following the Silicon Valley Bank debacle earlier this year. But perhaps a further increase in rates can be yet another impetus and reminder that banks are not passing along appropriate deposit rates given where the Fed Funds and Treasury markets are yielding.
I must admit that I did not expect the job market and the real economy to be as strong as it has been, given how much higher real interest rates increased and how much liquidity declined. Yet I do not think the second half of the year will be a great time for the markets, but I don’t see it deteriorating dramatically either. There will be a battle in the market dynamics between recession fears and a slowdown, with thoughts the Fed will respond by bringing in more accommodation and lowering rates.
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