There was bad news on the macro front Friday, although between Veteran’s Day, high drama in the crypto space and the lingering sugar high from Thursday’s fireworks, it had a distinctive “If a tree falls in the forest” feel.
Consumer sentiment deteriorated meaningfully at the beginning of November, the preliminary read on University of Michigan’s gauge showed. At 54.7, the headline print missed by a mile. Consensus wanted 59.5. The lowest estimate, from nearly five-dozen economists, was 56.
The index now sits at a four-month low (figure below). Every component fell from October.
“Declines in sentiment were observed across the distribution of age, education, income, geography and political affiliation, showing that the recent improvements in sentiment were tentative,” survey director Joanne Hsu said, adding that “instability in sentiment is likely to continue, a reflection of uncertainty over both global factors and the eventual outcomes of the election.”
The current conditions gauge tumbled, and the expectations index was materially lower too. Needless to say, consumers are concerned about rising rates and affordability in the face of sharply higher borrowing costs, elevated home prices and generationally high inflation.
The percentage of respondents mentioning high rates was the highest since the 1980s. Forgive me, but there’s little utility in charting that. Just about every chart related to rates and inflation looks broadly similar: The only modern precedent is the late 70s and early 80s.
Unfortunately, inflation expectations in the survey ticked higher again. Near-term expectations stood at 5.1%, up from a recent “low” of 4.7%, while the next five years gauge hit 3% for the first time since June (figure below).
Obviously, the upticks won’t offset the good vibes from Thursday’s CPI report, but Fed officials watch the five-year series from the Michigan survey closely.
Indeed, many argue it was the preliminary read on five-year expectations in the June survey (3.3%) which tipped the scales in favor of the first of what ended up being four consecutive 75bps rate hikes. That print was later revised lower.
All in all, the last of this week’s data suggested consumers are both Fed up and fed up, which, ironically, is just what the Fed wants, to the extent a disheartened consumer is a consumer who eschews the temptation to facilitate inflation with superfluous discretionary spending.
The faculative have facilitated their non preference it seems. The Fed, unknown god to the multitude has something to work with here.
These two factors are directly related. Inflation expectations kill sentiment. But they also tamp down aggressive consumption and speculative investment (think housing) which is about the only inflation factor our polity can control. So with respect to dampening inflation, both factors are a positive, IMHO.
Backward-looking qualitative survey