Friday’s consumer sentiment report may be a major market catalyst ahead of next week’s crucial Federal Reserve rate hike decision. What do you have to know about this week’s potential market mover?
Well, the University of Michigan releases preliminary March data for its Consumer Sentiment Index this Friday. The Consumer Sentiment Index measures consumer confidence changes in future and present business and labor conditions. Indeed, the index is divided into the Current Economic Conditions Index and Consumer Expectations Index, reflecting the difference between consumers’ current perceptions of the economy and future expectations going forward. This time around, economists and analysts are closely watching to see whether a Fed-induced slowdown is underway or if the U.S. is still in the calm before the storm.
What the Consumer Confidence Index Said
If you recall, consumer sentiment rose about 3% from January last month, from 64.9 to 67, the third consecutive month of growth. This is in starch contrast to the Conference Board Consumer Confidence Index, which recently concluded its second straight month of declining consumer sentiment.
Both the Conference Board and the University of Michigan maintain independent measures of U.S. consumer sentiment, with the former having released its February data just two weeks ago. The Conference Board’s Consumer Confidence Index fell to 102.9 in February from 106 in January. This is despite an increase in the Present Situation Index to 152.8 from 151.1 in January. The Expectations Index bore most of the brunt of the drop in consumer confidence, dropping from 76 in January to 69.7. Notably, this marks the 11th of the past 12 months where the Expectations Index has reached below 80 — a notorious recession predictor.
“Consumer confidence declined again in February. The decrease reflected large drops in confidence for households aged 35 to 54 and for households earning $35,000 or more,” said Ataman Ozyildirim, Senior Director of Economics at The Conference Board. “Expectations for where jobs, incomes, and business conditions are headed over the next six months all fell sharply in February.”
Interestingly, 12-month inflation expectations improved in February, as per the Conference Board report, dropping to 6.3% from 6.7% in January. Despite this, it’s also clear that consumers are more pessimistic overall. What should you expect in Friday’s report?
Consumer Sentiment Report Looms Large Ahead of Crucial FOMC Meeting
Perhaps the most important context for this week’s consumer sentiment report is the potential implications for the Fed’s rate hike decision next Wednesday. While not as impactful as, say, the jobs or inflation reports released over the past few weeks, the consumer sentiment report is the last major economic data release ahead of the central bank’s rate hike decision next Wednesday.
Current projections have the Fed pushing out a 25 basis-point rate hike, down from previous estimates of a 50-point hike. This downshift will likely occur due to the current instability in the banking sector caused by the SVB collapse. Indeed, despite Fed Chair Jerome Powell’s hawkish sentiment over the past few weeks, the bank failures have spotlighted the hidden dangers of rising lending rates. In that regard, it’s unlikely the content of the Consumer Sentiment Index shifts the Fed’s plans much, assuming there isn’t some drastic reversal.
An interesting aside — the Australian consumer sentiment index was released on Tuesday. Down under, things are looking, well… down. The Westpac Melbourne Institute Consumer Sentiment Index read 78.5 for the second straight month in March. This marks a record low for the report, reinforcing recessionary fears in the country.
Whether U.S. consumer sentiment follows a similar pattern Friday remains to be seen.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
