Is a Pause in Rate Hikes Coming?

Jeremy Siegel

May 22, 2023

Jeremy J. Siegel, WisdomTree’s Senior Investment Strategy Advisor, is the Russell E. Palmer Professor Emeritus of Finance at The Wharton School of the University of Pennsylvania. Professor Siegel has written and lectured extensively about the economy and financial markets and is a regular contributor to the financial news media. In 1994, he received the highest teaching rating in a ranking of business school professors conducted by BusinessWeek magazine. His book, Stocks for the Long Run, was named by The Washington Post as one of the 10 best investment books of all time. His latest book, The Future for Investors, is a bestseller.

Market activity last week seemed to hinge on the prospects of debt ceiling talks getting resolved and my sense was short sellers did not want to be caught short in a positive spike higher on headlines of a resolution of the stalemate. There certainly are other issues for the market beyond Washington politics, but the debt-ceiling saga remains top of mind and short sellers are looking for better re-entry spots. Readers of this commentary know my long-stated opinion: there is zero chance the debt issue will not get resolved even though there will be posturing and debate right up to the last minute before timelines are extended or the debt limit is raised.

Jerome Powell spoke with Ben Bernanke on Friday and there were a couple of interesting soundbites. Powell again emphasized job vacancies and demand for labor—so we will have to watch the JOLTS jobs data closely coming out next week. But Powell also talked about the tightness in policy coming from the bank lending issues—it sounded very much like he was leaning towards a pause in the hiking cycle. Based on the flurry and breadth of comments coming from Fed officials, I can see this next meeting in June being the first time with an official dissent whether the decision is a hike or a pause. I’ll emphasize again: the job prints are the key metric to watch at the moment to guide Fed action. Other inflation sensitive indicators like commodity prices have long since rolled over. If we get a hot jobs report and the JOLTS jobs openings report shows tightness, the hawks will have ammunition to keep tightening (wrongly in my view).

The 10-year bond yield has crept higher—and surprisingly the tech stocks remain resilient—while last year they were falling on higher interest rates. These tech companies are now viewed by many investors as defensive going into a recession and artificial intelligence (AI) excitement is further driving their prices higher.

Last week we commented on the surge in jobless claims and that we’d have to watch closely. The Labor Department commented the jump was rather suspicious, came mostly from one state (Massachusetts) and looked like fraudulent claims. This is a good reminder to be careful in analyzing all these high frequency and noisy indicators. So, claims came back down a bit but the trend is still upwards. The economic slowdown is not dramatic. Retails sales data came in last week on target. The economy is chugging along—growing around 2% on real gross domestic product (GDP) basis—which is actually above what the Fed forecast in March.

This week is a slow one for data releases—we have the Personal Consumption Expenditure (PCE) inflation indicators but that is stale news as much of it can be derived from the Consumer Price Index (CPI) and Producer Price Index (PPI) releases. The real important data will be the monthly jobs report and the JOLTS data next week. I believe there will be a pause in rate hikes, but a hot jobs report next week could challenge that thesis.

Past performance is not indicative of future results. You cannot invest in an index.

Professor Jeremy Siegel is a Senior Investment Strategy Advisor to WisdomTree Investments, 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.

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