Summary: University of Michigan consumer confidence index improves modestly, above expectations; views of present conditions, future conditions improve; recovers most of November loss; inflation expectations decline to be welcomed by US Fed.
US consumer confidence started 2020 at an elevated level but, after a few months, surveys began to reflect a growing unease with the global spread of COVID-19 and its reach into the US. Household confidence plunged in April 2020 and then recovered in a haphazard fashion, generally fluctuating at below-average levels according to the University of Michigan. The University’s measure of confidence had recovered back to the long-term average by April 2021 but then it plunged again in the September quarter and has since remained at historically low levels.
The latest survey conducted by the University indicates confidence among US households improved modestly on average in December. The preliminary reading of the Index of Consumer Sentiment registered 59.1, above the generally expected figure of 56.8 as well as November’s final figure of 56.8. Consumers’ views of current conditions and future conditions both improved in comparison to those held at the time of the November survey.
“Consumer sentiment rose 4% above November, recovering most of the losses from November but remaining low from a historical perspective,” said the University’s Surveys of Consumers Director Joanne Hsu.
US Treasury bond yields rose materially on the day. By the close of business, the 2-year Treasury yield had gained 8bps to 4.36%, the 10-year yield had added 9bps to 3.58% while the 30-year yield finished 13bps higher at 3.56%.
In terms of US Fed policy, expectations of higher federal funds rates over the next 12 months firmed a little. At the close of business, contracts implied the effective federal funds rate would average 4.12% in December, 29bps higher than the current spot rate, and then climb to an average of 4.71% in February 2023. May 2023 futures contracts implied a 4.95% average effective federal funds rate while November 2023 contracts implied 4.68%.
ANZ rates strategist Gregorius Steven noted a decline in consumers’ expectations of inflation over the next twelve months and said this “will be welcomed by the Fed” and increase the likelihood of smaller rate rises in the near term.
It was once thought less-confident households are generally inclined to spend less and save more; some decline in household spending could be expected to follow. However, recent research suggests the correlation between household confidence and retail spending is quite weak.