WISDOMTREE- Weekly commentary from Professor Jeremy J. Siegel (09/12/2022) :
We had volatility and pressure in risk markets last week following the hot CPI print last Tuesday. A reminder: the Consumer Price Index (CPI) reflects lagged data, especially the housing component which makes up 45% of the Core CPI that excludes food and energy costs. This housing CPI metric will continue to rise for months, even though real time indicators are showing considerable cooling in the housing markets. We should see the Case-Shiller Home Price indexes start to decline in the coming months.
We will get housing starts and housing sentiment indexes this week, while last month we had the largest 3-month decline in this sentiment’s history. The 30-year fixed mortgage rate is nearing 6.5%. With housing prices having increased 40% from the pandemic start, plus a 100% increase in mortgages, this shows why housing prices should come off.
The Fed funds rate was 2.33% last week. The April 2023 Fed fund market was pricing a 4.45% rate when I looked at it last week. In addition, The Fed funds futures markets also are underestimates of what the market expects to occur due to the hedging characteristics of the Fed funds futures. Over 200 basis points of tightening from now until April is not necessary in my view.
The market is concerned we will have overtightening from the Fed. The economy is slowing—and you can see that in earnings reports like the latest report from FedEx last week. Third quarter GDP estimates are being marked down and some of latest estimates show just a +0.5% real GDP for the third quarter. Given the strong labor market hiring, this third quarter will again show sharply negative productivity growth. The first half of the year showed the sharpest drop in productivity in 75 years. We need more studies of what is happening in productivity.
The economy is barely growing, nonetheless the labor market is strong. The Fed needs to understand this and how the rise in rates will impact the economy and not over tighten policy. We could be in for more rocky markets and added volatility if independent voices at the Fed do not question the current ultra-aggressive trajectory for policy.