by Professor Jeremy J. Siegel, Senior Economist to WisdomTree and Emeritus Professor of Finance at The Wharton School of the University of Pennsylvania
As the 10-year Treasury fell off the highs of 5% to 4.5-4.6%, the equity markets celebrated with a large relief rally.
I am not ready to call the recent Fed discourse a ‘Powell Pivot’, but I will refer to it as a ‘Powell Balanced Approach’, meaning he’s looking at both sides of the tightening debate. This balanced Powell approach supports the equity markets as I see a December rate hike off the table following the latest employment report which was weak. Of course, Powell’s recent speeches say everything is on the table, all the time. He has to say the Fed is data dependent, but the data today doesn’t indicate another rate hike.
Last week was light on the data front, as it always is the week after an employment report. The jobless claims—our best weekly real time employment and economic indicator—did not increase. This is a good sign of health for the economy.
We did get a weak University of Michigan Consumer Sentiment Survey report on Friday. That data point has gone down four consecutive months. Also, particularly surprising to me was a jump in inflationary expectations from this University of Michigan Consumer Sentiment Survey. This jump came despite gasoline prices and oil softening. This is speculation, but higher expectations for inflation could be fears of the Hamas-Israel war broadening into a wider conflict that sends oil prices higher.
Powell has mentioned consumer sentiment surveys as something he watches, but clearly, he will be watching most closely the actual inflation reports that we will receive this week. Expectations for the Consumer Price Index (CPI) overall number is up 0.1%, and 0.3% for the core. If these levels materialize, overall CPI inflation over the trailing 12 months may drop to 3.1%, the lowest level in more than two years. And this headline inflation includes stale housing data, which I do not think reflects the current reality.
The next Fed meeting is December 13th, and we will have both the Producer Price Index (PPI) and CPI reports released while the Fed is meeting—so there will be more information on hand, along with another employment report. At the December meeting, we will also get the Dot Plot for what the Fed expects in 2024—all things that can dictate the tone for the markets into the new year.
On a fundamental basis, earnings have been coming in quite good outside of the energy stocks.
We have some warnings on the fourth quarter. From what I've read, the fourth quarter has been brought down by a big drop in Pfizer and Moderna from less people getting the COVID vaccines.
But earnings and lower rates are helping support the relief rally. Now we look to the inflation data to see if Powell can remain balanced with an eye towards lowering rates next year as inflation moderates and the economy slows off strong growth.
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