Morning Report: Dour consumer sentiment

Vital Statistics:

 LastChange
S&P futures3,97140.25
Oil (WTI)109.313.19
10 year government bond yield 2.90%
30 year fixed rate mortgage 5.44%

Stocks are rebounding this morning on no real news. Bonds and MBS are down small.

Jerome Powell sounded hawkish yesterday when discussing inflation.

“We fully understand and appreciate how painful inflation is,” Powell said in an interview with the Marketplace national radio program, repeating his expectation that the Fed will raise interest rates by half a percentage point at each of its next two policy meetings while pledging that if data turn the wrong way “we’re prepared to do more. Nothing in the economy works, the economy doesn’t work for anybody without price stability…We went through periods in our history where inflation was quite high … The process of getting inflation down to 2% will also include some pain, but ultimately the most painful thing would be if we were to fail to deal with it and inflation were to get entrenched in the economy at high levels, and we know what that’s like. And that’s just people losing the value of their paycheck.”

Import prices were flat in April after rising steadily for months. The US dollar has been rallying on higher interest rates in the US, which is helping offset rising inflation overseas. On a year-over-year basis they were up 7.2%.

Consumer sentiment fell in May, according to the University of Michigan Consumer Sentiment Survey. As you can see from the chart below, consumer sentiment is associated with lows that are generally associated with deep recessions (especially 2008 – 2010 and 1980 – 1982). Inflation is the driving force here.

Consumers’ assessment of their current financial situation relative to a year ago is at its lowest reading since 2013, with 36% of consumers attributing their negative assessment to inflation. Buying conditions for durables reached its lowest reading since the question began appearing on the monthly surveys in 1978, again primarily due to high prices. The median expected year-ahead inflation rate was 5.4%

Surveys of Consumers Director Joanne Hsu

The one bright spot in the report is that consumers believe longer-term inflation will drop to 3% or so, which is still above the Fed’s long-term rate but probably not high enough to materially change consumer behavior.

Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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