Professor Siegel's Weekly Commentary Archive
Another Solid Week for the Markets
July 17, 2023
We had another solid week for the markets, bolstered by strong economic data and great news on inflation—as both the PPI and the CPI came in below expectations. Import and export prices also came in below expectations on Friday. All this inflation data has been trending quite well.
Shelter inflation as reported by the BLS is a very lagging indicator—and the BLS CPI press release documented two thirds of the 4.8% core CPI was driven by shelter running at 7.8% for the last 12 months. Using more real time shelter measures reflected in Case-Shiller housing indexes and Zillow rent, would give you just a 1.4% core CPI over the last 12 months instead of the 4.8% officially reported by the BLS.
Certainly, what has surprised me is how strong the real economy remains. Initial jobless claims—which I track as one of the most real time and time sensitive data points we receive every week—dropped again and is showing more signs of economic resilience than weakness. We also had a very strong beat on the University of Michigan Consumer Sentiment Survey. There was a bit of an increase in inflationary expectations from the Survey, but I would look past that as the surveys were taken before the very good headline readouts of the CPI and PPI.
As for the upcoming Fed meeting, it looks like a lock for a 25-basis point rate hike in July. We will get one more initial jobless claims data point but no other inflation prints. I don’t see anything deterring the Fed from raising at this next meeting, but much more interesting will be whether there is a second hike later this year.
We learned of the unexpected retirement of Jim Bullard, the President of Federal Reserve Bank of Saint Louis. I have enjoyed getting to interview Jim on our Behind the Markets podcasts over the last decade. Jim was not a voting member of the Fed this year but was a very hawkish voice. His former Director of Research is now Fed Governor Chris Waller—who has taken up the hawkish mantle at the Fed and even last week was on the tape saying two more rate hikes could very well still be appropriate. I don’t think Jim’s retirement will change the outcome of Fed policy over the short run— there is still a large number of hawks left at the table.
I give Jim credit for a number of ideas—including refusing to give long run prediction for the Federal Funds rate because he thought it was difficult to assess future regimes and views the long-term real rate was changing. He was one of the first people to talk about the long-term downward trend of real interest rates. But I also would point out how many times after the financial crisis he told us on Behind the Markets that he would not let the Fed invert the yield curve again because it was such a negative sign for the economy, and he wouldn’t be fooled by arguments ‘this time is different.’ But now of course the yield curve is extremely inverted, and Jim wanted to hike even further to deepen the inversion. That puzzled me and I do not know what changed his mind. Nonetheless, Jim is a very bright and innovative man and certainly his voice will be missed at the Fed.
For now, as far as equities are concerned, the positive trend is the friend of the markets. The markets think the Fed stuck a perfect, soft-landing scenario. Everyone has pushed back the probability of a recession. I do not think the Fed should raise rates again, as downside risks exceed upside risks, but I can certainly understand the views of the hawks who do.
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