Stocks are higher this morning as oil prices fall on optimism for a resolution in Iran. Bonds and MBS are up smartly.
The week ahead will contain the personal incomes and outlays report, which includes the PCE Price Index, which is the Fed’s preferred measure of inflation. We will also get home price indices from Case-Shiller and FHFA.
Consumer sentiment fell in May, according to the University of Michigan Consumer Sentiment Survey. These consumer surveys are often inverse gasoline price indices, so it isn’t surprising to see the index fall.
Inflation expectations rose to 4.8% from 4.7% and longer run expectations rose from 3.5% to 3.9%. The increase in long-term expectations will be a worry for the Fed. You hear the phrase “inflationary expectations are well-anchored.” That means that inflation expectations are not yet affecting behavior. This behavior includes front-loading supply orders to get ahead of price hikes and employees negotiating bigger raises. So far, we aren’t seeing this behavior (certainly not in the labor market), but it is a possibility for businesses, especially in energy. Relief is probably on the way however as the more and more wells that were drilled during the last energy spike (2005 or so) become economic and begin production.
“Consumer sentiment fell for the third straight month as supply disruptions in the Strait of Hormuz continue to boost gasoline prices. Sentiment is now just below the previous historical trough seen in June 2022. The cost of living continues to be a first-order concern, with 57% of consumers spontaneously mentioning that high prices were eroding their personal finances, up from 50% last month. Lower-income consumers and those without college degrees posted particularly strong sentiment declines; these groups are more sensitive to increases in the cost of gas and other essentials. Independents and Republicans saw decreases in sentiment, with both groups reaching their lowest readings of the current presidential administration. Meanwhile, sentiment of Democrats was little changed from last month. Critically, consumers appear worried that inflation will increase and proliferate beyond fuel prices, even in the long run.”
The index of leading economic indicators improved in April, according to the Conference Board. “The US LEI increased slightly in April, driven mainly by a rebound in stock prices and an increase in building permits, only for two and more units,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “The leading index rose in two of the past three months, but the gains did not offset the steep fall registered in March. As a result, the LEI’s six- and twelve-month growth rates were negative, signaling fragile economic conditions ahead. Strong investment in AI infrastructure, data centers, and energy production likely will have a positive impact on growth and sustain business spending, but may only partially offset weakness on the consumer side. Higher gasoline and energy costs—paired with weak hiring—will likely erode household purchasing power in the months ahead, particularly for lower- and middle-income consumers. The Conference Board is currently projecting 1.7% y/y GDP growth in 2026, revised up slightly from last update of 1.6%.”
