U.S. Consumer Sentiment Rebounds but Fails to Create Volatility as Markets Await the Fed

CONSUMER SENTIMENT KEY POINTS:

  • June Consumer Sentiment bounces back and rises to 86.4 from 82.9, beating market expectations
  • The report produced by the University of Michigan fails to generate a pronounced market reaction as investors remain focused on next week’s FOMC meeting.
  • No change in monetary policy is expected, but the central bank may offer clues about its next steps in light of mounting inflationary pressures in the United States.

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U.S. consumer sentiment rebounded in June after an unexpected drop in May according to the University of Michigan. In a preliminary survey, the research institution said that its consumer sentiment index rose 86.4 from 82.9 in the previous month, beating market consensus that had projected an increase to 84.

The breakdown of the report showed that the current economic condition indicator jumped to 90.6 from 89.4 while the consumer expectations component moved up to 83.8 from 78.8. Meanwhile, 1-year inflation expectation declined six tenth of a percent to 4.0% while the 5-10 year metric dropped to 2.8% from 3.0%

The following table summarizes the June data, highlighting actual results versus market forecasts:

Source: DailyFX Economic Calendar

The increased optimism showcased by the sentiment index can be seen as a positive variable for the recovery in the post-pandemic period as it may be a sign of healthy spending at a time when saving balances and household net worth ($5 trillion) are at a record high. Given that consumers are the main engine of growth in the U.S. and account for roughly two-thirds of the economy, Wall Street tends to track their confidence levels closely as a somewhat reliable proxy for future consumption.

In any case, the data published this morning has not caused much volatility as investors remain on the sidelines ahead of the FOMC meeting next week. Although no action is expected in terms of monetary policy, the Fed will release its new macroeconomic forecasts (SEP), including the famous dot-plot, where officials provide their individual outlook for borrowing costs over several years and the longer-term. The median of expectations in the diagram will likely show no hikes in interest rates through 2023, but any deviation from that scenario (i.e. tightening is brought forward) may result in a bullish move in the US dollar.

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The entity headed by Jerome Powell, through its forward guidance, could also shed some light on its next steps in the face of mounting worries due to the sharp increase in inflationary pressures. In this sense, any information (or lack thereof) on the start of the tapering debate may become a source of market volatility during the week, creating short-term trading opportunities in many asset-classes.

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—Written by Diego Colman, DailyFX Market Strategist

Follow me on Twitter: @DColmanFX

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