Professor Siegel's Weekly Commentary Archive
It Appears Goldilocks Rules the Day
June 5, 2023
Last Friday’s data and the comments from Fed officials earlier last week represent a truly Goldilocks situation for equities, which is why the market rallied so strongly last Friday.
The nominee for Fed Vice Chair, Philip Jefferson, suggested all signs pointed to a skip in rate hikes at the June meeting. Patrick Harker, Philadelphia Fed President and another voting member, agreed and thought this meeting was a skip situation. Jefferson’s comments are very much likely a signal from Powell to talk down the Fed funds futures market, which had been starting to price in higher odds of a hike.
Friday’s numbers did not change the ‘skip’ narrative. The nonfarm payroll job increase came in ahead of expectations and headlines read out that ‘jobs beat’ expectations. But there were two really important offsets.
First, there was a 0.1-hour decline in average hours worked. With our 156 million workers, 34.3 hours worked represents a 0.3% decrease in hours worked. To keep total hours worked across all employees constant, 453,000 new workers were required. Instead, we got 339,000 new workers and so total hours decreased on balance. Most commentators do not concentrate on those hours worked trends.
Even more important, the household report showed a jump in the unemployment rate from 3.4% to 3.7%. I was worried if unemployment continued trending down, we would have unprecedented tightness in that labor market and hawks at the Fed would want to keep raising rates. More slack with higher unemployment takes pressure off wages. Yes, the Job Openings and Labor Turnover Survey (JOLTS) job openings data did show a little more tightness earlier in the week but remember there are many less firms responding to those surveys than previously and it may be a less reliable indicator.
The market received and interpreted a clear message: at least for June, there will very unlikely be another hike. We shall see a lot more data to determine what the Fed decides at the July meeting. And of course, there is an important Consumer Price Index (CPI) release the day the Fed meeting begins.
The market is celebrating a rather strong earnings season and less fears of Fed overtightening—keeping earnings estimates for the remainder of the year reasonably well supported.
I still believe we will have negative payroll reports later this year from the over-tightening that has already occurred. There is still risk in the economy due to these very elevated interest rates. But the data from Friday represents a very positive and welcome dynamic.
Commodity prices jumped last week, largely on the relief the Fed would not take actions to further slow the economy. Those commodity prices are still in a longer-term downtrend and will not create an inflationary impulse with the current trajectory.
I was surprised we had a second month in a row of higher home prices, as the Case-Shiller housing index increased 0.4%. The higher interest rates and 40% increase in home prices more than doubled the cost of homes for buyers. Mortgage rates had ticked down to 6% a few months ago before rising back above 7% now—so perhaps we see some renewed softness in housing prices.
Summarizing: The Fed must be patient in terms of the cumulative effect of its tightening. It seems more members at the Fed get this reality, and while there likely will be some official dissents from hawks who do not want to stop raising rates, the data is coming in well for those who want a pause. For now, it appears Goldilocks rules the day and markets.
Past performance is not indicative of future results. You cannot invest in an index. Professor Jeremy Siegel is a Senior Economist to WisdomTree, Inc. and WisdomTree Asset Management, Inc. This material contains the current research and opinions of Professor Siegel, which are subject to change, and should not be considered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product and it should not be relied on as such. The user of this information assumes the entire risk of any use made of the information provided herein. Unless expressly stated otherwise the opinions, interpretations or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.