Preliminary University of Michigan numbers leave weakening case for further monetary tightening in play
On balance, the figures play into the hands of the ‘doves’ on the FOMC
Last Friday’s preliminary inflation expectations numbers published by the University of Michigan will have been welcomed by the Fed. The one-year expectations reading showed that US consumers now expect an inflation rate of just 3.3% over the next 12-months, still above the Fed’s 2% target, but printing at its lowest level since March 2021 and, probably of most importance, registering a 0.9% fall from May’s print. The 5yr/10yr reading – the expectations number the Fed watches most closely – also printed lower, falling from 3.1% to 3.0%, and reversing two consecutive months of 0.1% increases. A reading of 3.1% will still be too high for comfort for the Fed, with on-going concerns about the potential for a wages/price spiral still yet to be fully put to bed, but the bigger picture is that expectations continue to remain with the 2.7%-3.1% range they have sat in for some two years now, suggesting that inflation expectations remain anchored. On a further positive note for the Fed, the continued downwards movement being seen in global food and energy prices suggests potential remains for the 5yr/10yr reading to fall further, given that consumer expectations of inflation are most sensitive to the prices of these two key items of expenditure.
Separately, the survey showed consumer sentiment rising to a four-month high of 63.9, the number no doubt boosted by the agreement reached in resolving the debt-ceiling crisis. However, of concern will be the details found in the report, which highlighted that US workers are becoming increasingly concerned about job security and incomes. As the US labour market continues to normalise, the strong wages growth seen in the aftermath of the covid pandemic are largely now a thing of the past, with wages settlements now on course to settle around the 3.0%-3.5% level seen before the pandemic hit. Similarly, job security has also softened as the labour participation rate has largely normalised and the excess demand previously seen for jobs eroded. Overall, the sentiment level remains significantly below past readings. But, it is actual spending that matters to the economy, not sentiment per se, and the relationship between spending and sentiment can be somewhat tenuous at best.
Thus, on balance, Friday's report very much delivers into the hands of the ‘doves’ on the FOMC and suggests the weakening case for further monetary tightening remains in play.