Risk assets really didn’t need another reason to cheer on Friday amid rampant trade optimism, but they got one anyway in the form of a “Goldilocks” University of Michigan sentiment report.
The preliminary print for October is 96.0. That’s ahead of even the most optimistic estimate from 52 economists and represents a nice bounce from September’s final read (93.2).
You’ll recall that sentiment collapsed to a Trump-era low in August amid recession fears and trade balderdash (in fairness, “Trump-era lows” still represent elevated levels).
The current conditions index jumped to 113.4 compared to 108.5 last month, and expectations rose to 84.8, up from 83.4.
But the “best” (the scare quotes are there for a reason) part of the report is a record-low read on long-term inflation expectations, which fell to just 2.2% in early October. That is the lowest read on annual inflation since the question began in 1979.
Ostensibly, that helps make the case for more Fed cuts. The September FOMC minutes showed doves expressing serious concern about ensuring the US doesn’t fall into the “Japanification” trap, and that record-low print will, if only on the margin, reinforce those concerns.
Meanwhile, expected increases in household incomes rose to 2.4%. That’s up from September’s 2.0% and 2018’s 1.8%.
“Sentiment rebounded in early October as consumers anticipated larger income gains and lower inflation during the year ahead”, Richard Curtin, director of the University of Michigan survey, said. “As a result, real income expectations rose to their most favorable level in two decades”.
And yet, uncertainty remains. “A slower pace of overall economic growth is still anticipated, including some modest increases in the national unemployment rate during the year ahead”, Curtin goes on to say, adding that “there are significant global and domestic uncertainties that will keep consumers cautious spenders, although the income gains among lower and middle income households will translate into higher spending among these households”.
Notably, Curtin says “the impeachment inquiry has not had a significant negative impact on economic prospects [as] it was negatively mentioned by about half as many as negatively mentioned the GM strike (3% versus 5%)”.