by Professor Jeremy J. Siegel, Senior Economist to WisdomTree and Emeritus Professor of Finance at The Wharton School of the University of Pennsylvania
The Goldilocks scenario for the economy and markets continued to play out nicely in Friday’s labor market report. Friday’s data came in strong, with a slight upward revision to the previous two months of payroll reports. The unemployment rate dropped to 3.8%, backing right into a sweet spot for unemployment between 3.6% - 4%. I was also happy to see the average hours worked bounced up to 34.4, which is a positive sign. We're back up to the 24-year average after a dip earlier this year. There was also a slight tick up in the participation rate, which is very good for labor market slack and wage pressure concerns.
Our other favorite indicator, the unemployment claims, ticked up to the exact middle of our desired range of 200k - 240k. So, both the unemployment rate and jobless claims moved to the center of our sweet spots—not too hot or cold.
The question now is how these reports feed into the Fed policy. The Consumer Price Index (CPI) and Producer Price Index (PPI), to be released this week, will be even more important. We look at the shelter component of inflation because we think that this is now overstated by the Bureau of Labor Statistics (BLS), which has been two-thirds of the increase of the CPI year over year. The early call is for year-over-year core CPI to decelerate to 3.7%, which would be the lowest level since the COVID-19 pandemic began. A lower reading, which is very possible, will bring a nice equity rally.
Is there anything to worry about? One of the things I am watching with slight unease is the rise in commodity prices. While some of it is due to oil and the situation in the Middle East, price increases are also spreading to other commodities. I don't think that this is a precursor to another inflationary period, but rather it’s from the strength of the economy. However, as we have been saying for weeks, all the commodity indexes have broken out from their down trends and have started upward. This week was one of the strongest weeks for commodity price rises in many months. This bears watching but is not yet a negative.
The trend of equity prices is upward, and the momentum is still there. The strength in the economy with a 2.5% trend for first quarter GDP should be very positive for earnings in this quarter. We believe that this bull market in equities is not over.
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