Consumers were less optimistic to start the month of February, as the U of Michigan sentiment index declined for the second straight month, from 71.7 to 67.8. It’s lowest level since July.
The decline appears to be entirely based upon a sharp spike in inflation expectations. With consumers expecting inflation to rise 4.3% over the next 12 months, a 15 month high.
This is the 4th straight month inflation expectations have increased.
The shifting expectations seems to be a result of uncertainty surrounding tariffs and their effect on prices. Sometimes this can actually result in a spike in economic activity. As consumers will rush to buy things now if they perceive that prices will increase in the future. But that doesn’t appear to be the case for certain big ticket items, per U of M:
“Furthermore, all five index components deteriorated this month, led by a 12% slide in buying conditions for durables, in part due to a perception that it may be too late to avoid the negative impact of tariff policy.”
And:
“This is only the fifth time in 14 years we have seen such a large one-month rise (one percentage point or more) in year-ahead inflation expectations.”
Bear in mind that sentiment can often be wrong. We still don’t have any concrete agenda in place to even make such assumptions. It’s possible that sentiment could be shifting too negative. It certainly wouldn’t be the first time.
Strong jobs data plus spiking inflation expectations means the Fed is most likely on hold for a while. We had a pullback in interest rates, with the 10-year declining below 4.5% after briefly rising above last years high. We’ve about matched the size of the last pullback (rectangle highlights), and after today's data, price seems to be finding support again.
The US dollar is ping-ponging between the prior swing high around $110 above and the 50-day moving average below. After today’s data, the USD may be firming up again as well.
Tightening financial conditions (rising rates and USD) can have a negative effect on liquidity, which can put some temporary downside pressure on stocks. I continue to monitor that measured move pivot point as resistance above (red line at 6115), I mentioned a while back. This is now the 4th time the market has failed to break above that level convincingly.