Professor Siegel's Weekly Commentary Archive
What a Difference 72 Hours Can Make…
March 13, 2023
The Labor Market report came out on the morning of March 10th and I thought it was good news in the sense that it gives some breathing room for the Fed. I think it supports a 25-basis point increase in the Fed Funds rate instead of a 50-basis point increase, which people had been starting to discuss in earnest between Chairman Powell’s testimony on March 7th and the release of this report.
To be sure, the change in nonfarm payroll was a very robust 311,000, which was 80,000 above expectations. Also, there was only a tiny revision downward to the mammoth 517,000 that we saw reported in the month of January, but February’s details were much softer than these large numbers might imply. First of all, employment was very concentrated in leisure and hospitality. In fact, manufacturing payrolls actually declined by 4,000. That is the first decline in two years on manufacturing payrolls.
Another good piece of news, from the perspective of supporting a 25-basis point hike instead of a 50, is that the unemployment rate ticked up from the very tight 3.4%, which represents a 60-year low, to 3.6%, two-tenths of a percentage point higher. Average hourly earnings, which were expected to be up three-tenths of a percentage point (and some people were even thinking four-tenths) were only up two-tenths of a percent and year-over-year wages were below expectations.
The work week was also revised downward, initially reported to have been three-tenths of a percent in January, tying an all-time record. I said that's a figure likely to be revised downward and it was. It was only up two-tenths of a percent in January, and it fell by another one-tenth in February.
When you take it as a whole, the report definitely shows a slowing down. Also, on March 9th the initial jobless claims came in for the first time in many weeks over 200,000. The U-6 unemployment rate, which is a broader measure, also moved up two-tenths of a percent, and it’s notable that the participation rate went up telling us that people are entering the labor force.
What really pushes the compass to a 25-basis point move, in my opinion, is what happened to Silicon Valley Bank (SVB).
This bank went from a market value of over 20 billion dollars to nothing, as California regulators have closed the bank. It’s my expectation that all deposits will be paid off and I do think the banking system is extremely strong, but it’s the psychological implication that is important; understandably regional banks were hit really hard. This must be on the minds of the Fed Governors.
SVB’s problems stemmed from capital losses on fixed income portfolios. What happened shows how quickly a run on a mid-sized bank can turn into crisis. This bankruptcy is going to be all over the headlines and in the public’s consciousness, since combined with the downfall of Silvergate, a bank more focused on crypto lending, there are now failures of two banks in a short period of time. Fed officials are going to get some calls from regional banks and so I am betting that they will not want to raise rates too quickly and I predict a 25-basis points increase much more confidently.
One should note that this week is another big week for data. We still have two weeks until the Federal Open Market Committee (FOMC). On Tuesday, March 14th, we get the Consumer Price Index (CPI) report. The following day we get the Producer Price Index (PPI) report and retail sales for the month of February. Those are also going to be very important reports. We’ll also see another initial jobless claims report.
Of course, we've been saying all along that the CPI report contains a lot of backward-looking data and to suss out what is the forward-looking data is not always easy. Chairman Powell is now looking at what's called CPI ex-energy, ex-food and ex-rent, so it’s a smaller and smaller group of goods and services involved in his preferred measurement. Still, commodities prices are going down and the 30-year fixed rate mortgage rate, now near 7.25%, is going to depress the housing market in March and April.
Does the Fed want to do 50 basis points in light of all this new data that has come out in the past 72-hours since Chairman Powell’s testimony? My feeling is no, but if initial jobless claims drop back below 200,000 you could see it emboldening the hawks and maybe, just maybe, we’ll see our first dissenting vote in many months from the FOMC.
I look forward to this week and next!
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