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Conf. Board sentiment index falls back in June; job market strength offsetting concerns for future

25 June 2024

Summary: Conference Board Consumer Confidence Index down in June, slightly above expectations; strength in current labour market views continue outweighing concerns about future; US Treasury yields increase modestly; Fed rate-cut expectations soften slightly; decline centred on consumers aged 35-54; views of present conditions improve, short-term outlook deteriorates.

US consumer confidence clawed its way back to neutral over the five years after the GFC in 2008/2009 and then went from strength to strength until late 2018. Measures of consumer confidence then oscillated within a relatively narrow band at historically high levels until they plunged in early 2020. Subsequent readings then fluctuated around the long-term average until March 2021 when they returned to elevated levels. However, a noticeable gap has since emerged between the two most-widely followed surveys.

The latest Conference Board survey completed in the third week of June indicated US consumer confidence has resumed deteriorating after a brief uptick in May. June’s Consumer Confidence Index registered 100.4 on a preliminary basis, slightly above the generally-expected figure of 100.0 but down from May’s final figure of 102.0.

“Confidence pulled back in June but remained within the same narrow range that’s held throughout the past two years, as strength in current labour market views continued to outweigh concerns about the future,” said Dana Peterson, Chief Economist at The Conference Board. 

US Treasury bond yields rose modestly along the curve on the day. By the close of business, the 2-year Treasury bond yield had added 1bp to 4.78%, the 10-year yield had gained 2bps to 4.25% while the 30-year finished 1bp higher at 4.38%.

In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months softened slightly, although at almost four 25bp cuts are still currently factored in. At the close of business, contracts implied the effective federal funds rate would average 5.305% in August, 3bps less than the current spot rate, 5.24% in September and 5.075% in November. June 2025 contracts implied 4.34%, 99bps less than the current rate.

“The decline in confidence between May and June was centred on consumers aged 35-54,” Peterson added. “By contrast, those under 35 and those 55 and older saw confidence improve this month. No clear pattern emerged in terms of income groups.”

Consumers’ views of present conditions improved while their views of the near-future deteriorated. The Present Situation Index increased from May’s revised figure of 140.8 to 141.5 while the Expectations Index declined from 74.9 to 73.0.

The Consumer Confidence Survey is one of two widely followed monthly US consumer sentiment surveys which produce sentiment indices. The Conference Board’s index is based on perceptions of current business and employment conditions, as well as respondents’ expectations of conditions six months in the future. The other survey, conducted by the University of Michigan, is similar and it is used to produce an Index of Consumer Sentiment. That survey differs in that it does not ask respondents explicitly about their views of the labour market and it also includes some longer-term questions.

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Consumer sentiment up in June but inflation, interest rates weigh

25 June 2024

Summary: Westpac-Melbourne Institute consumer sentiment index up in June; Westpac: fiscal support measures negated by increased concerns about inflation, outlook for interest rates; ACGB yields decline; rate-cut expectations firm; Westpac: sentiment deteriorated materially following June RBA decision; four of five sub-indices higher; more respondents expecting higher jobless rate.

After a lengthy divergence between measures of consumer sentiment and business confidence in Australia which began in 2014, confidence readings of the two sectors converged again in mid-July 2018. Both measures then deteriorated gradually in trend terms, with consumer confidence leading the way. Household sentiment fell off a cliff in April 2020 but, after a few months of to-ing and fro-ing, it then staged a full recovery. However, consumer sentiment then weakened considerably and has languished at pessimistic levels since mid-2022 while business sentiment has been more robust.

According to the latest Westpac-Melbourne Institute survey conducted over four days in the middle of June, household sentiment has improved, albeit to a level which is still quite pessimistic. Their Consumer Sentiment Index increased from May’s reading of 82.2 to 83.6, a reading which is significantly lower than the long-term average reading of just over 101 and well below the “normal” range.

“The survey detail suggests positives from fiscal support measures are being negated by increased concerns about inflation and the outlook for interest rates,” said Westpac senior economist Matthew Hassan.

Any reading of the Consumer Sentiment Index below 100 indicates the number of consumers who are pessimistic is greater than the number of consumers who are optimistic.

Commonwealth Government bond yields declined modestly along the curve on the day, generally lagging the overnight falls of US Treasury yields. By the close of business, 3-year and 19-year ACGB yields had both slipped 1bp to 3.89% and 4.21% respectively while the 20-year yield finished 2bps lower at 4.53%.

Expectations regarding rate cuts in the next twelve months firmed by the end of the day. In the cash futures market, contracts implied the cash rate would remain close to the current rate until at least the end of the year and average 4.32% through July, 4.35% in August and 4.335% in November. However, February 2025 contracts implied 4.255% while May 2025 contracts implied 4.12%, 20bps less than the current cash rate.

“Responses over the course of the survey week show sentiment deteriorated materially following the June RBA decision,” added Hassan. “The implication is that some consumer hopes of a more positive message on inflation and the interest rate outlook were again dashed.”

Four of the five sub-indices registered higher readings, with the “Family finances versus a year ago” sub-index posting the largest monthly percentage gain.  

The Unemployment Expectations index, formerly a useful guide to RBA rate changes, increased from 129.8 to 133.1, a little higher than the long-term average. Higher readings result from more respondents expecting a higher unemployment rate in the year ahead.

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ifo index slips in June; Germany having difficulty overcoming stagnation

24 June 2024

Summary: ifo business climate index declines in June, slightly less than expected; German economy having difficulty overcoming stagnation; current conditions index steady, expectations index down; German, French yields little changed; ANZ: dip in expectations first in five months, mainly concentrated in manufacturing; expectations index implies euro-zone GDP contraction of 0.7% in year to September.

Following recessions in euro-zone economies in 2009/2010, the ifo Institute’s Business Climate Index largely ignored the European debt-crisis of 2010-2012, mostly posting average-to-elevated readings through to early-2020. However, the index was quick to react in the March 2020 survey, falling precipitously before recovering quickly in subsequent months. Readings through much of 2021 generally fluctuated around the long-term average before dropping away in 2022 and stagnating through 2023.

According to the latest report released by ifo, German business sentiment weakened further from its already-depressed level. June’s Business Climate Index posted a reading of 88.6, slightly below the generally expected figure of 89.3 as well as May’s final reading of 89.3. The average reading since January 2005 is just over 96.

“The German economy is having difficulty overcoming stagnation,” said Clemens Fuest, President of the ifo Institute.

German firms’ views of current conditions remained steady while their collective outlook deteriorated slightly. The current situation index was unchanged at 88.3 while the expectations index declined from 90.3 after revisions to 89.0.

German and French long-term bond yields were little changed on the day. By the close of business, the German 10-year yield had added 1bp to 2.41% while the French 10-year yield finished 1bp lower at 3.14%.

“The dip in expectations was the first in five months and mainly concentrated in the manufacturing sector,” said ANZ economist Madeline Dunk. “It is possible that the earlier EU announced tariffs on EVs from China may have weighed on sentiment.”

The ifo Institute’s business climate index is a composite index which combines German companies’ views of current conditions with their outlook for the next six months. It has similarities to consumer sentiment indices in the US such as the ones produced by The Conference Board and the University of Michigan.                                 

It also displays a solid correlation with euro-zone GDP growth rates. However, the expectations index is a better predictor as it has a higher correlation when lagged by one quarter. June’s expectations index implies a 0.7% year-on-year GDP contraction to the end of September.

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US leading index falls; growth expected to slow in second, third quarters

21 June 2024

Summary: Conference Board leading index down 0.5% in May, worse than expected; doesn’t currently signal recession; US Treasury yields barely change; rate-cut expectations firm slightly; regression analysis implies 0.3% contraction in year to August.

The Conference Board Leading Economic Index (LEI) is a composite index composed of ten sub-indices which are thought to be sensitive to changes in the US economy. The Conference Board describes it as an index which attempts to signal growth peaks and troughs; turning points in the index have historically occurred prior to changes in aggregate economic activity. Readings from March and April of 2020 signalled “a deep US recession” while subsequent readings indicated the US economy would recover rapidly. Readings post-2022 implied US GDP growth rates would turn negative but that has not been the case so far.

The latest reading of the LEI indicates it decreased by 0.5% in May. The fall was worse than the 0.3% decline which had been generally expected but it was a slightly better result than April’s figure of -0.6%.

“While the Index’s six-month growth rate remained firmly negative, the LEI doesn’t currently signal a recession,” said Justyna Zabinska-La Monica of The Conference Board. “We project real GDP growth will slow further to under 1% annualized over Q2 and Q3 2024, as elevated inflation and high interest rates continue to weigh on consumer spending.”

The reading came out the same day as the latest S&P Global PMIs and US Treasury bond yields barely moved. By the close of business, the 2-year Treasury yield had slipped 1bp to 4.73% while 10-year and 30-year yields both finished unchanged at 4.26% and 4.40% respectively.

In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months firmed slightly, with four 25bp cuts currently factored in. At the close of business, contracts implied the effective federal funds rate would average 5.30% in August, 3bps less than the current spot rate, 5.24% in September and 5.075% in November. June 2025 contracts implied 4.335%, 100bps less than the current rate.

Regression analysis suggests the latest reading implies a -0.3% year-on-year growth rate in August, up from -0.4% for the year-to-July growth rate.

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Euro-zone household sentiment index up for fifth consecutive month

21 June 2024

Summary: Euro-zone consumer sentiment improves slightly again in June, index slightly below expected; consumer confidence index still well below long-term average; euro-zone bond yields move inconsistently.

EU consumer confidence plunged during the GFC and again in 2011/12 during the European debt crisis. After bouncing back through 2013 and 2014, it fell back significantly in late 2018 but only to a level which corresponds to significant optimism among households. Following the plunge which took place in April 2020, a recovery began a month later, with household confidence returning to above-average levels from March 2021. However, readings subsequent to early 2022 were extremely low by historical standards until recently.

Consumer confidence improved for a fifth consecutive month in June, according to the latest survey conducted by the European Commission. Its Consumer Confidence Indicator recorded a reading of -14.0, slightly below the generally expected figure of -13.8 but up from May’s reading of -14.3. This latest reading is still well below the long-term average of -10.5 and just above the lower bound of the range in which “normal” readings usually occur.

Sovereign bond yields in major euro-zone bond markets moved inconsistently on the day. By the close of business, the German 10-year yield had added 1bp to 2.42% while the French 10-year yield finished 2bps lower at 3.15%.

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Relatively resilient US consumer spending softening; retail sales up 0.1% in May

18 June 2024

Summary: US retail sales up 0.1% in May, less than expected; annual growth rate slows to 2.3%; Westpac: a sign relatively resilient consumer spending softens; US Treasury yields fall moderately; rate-cut expectations firm; higher sales in eight of thirteen categories; petrol station sales largest single influence on month’s result.

US retail sales had been trending up since late 2015 but, commencing in late 2018, a series of weak or negative monthly results led to a drop-off in the annual growth rate below 2.0%. Growth rates then increased in trend terms through 2019 and into early 2020 until pandemic restrictions sent them into negative territory. A “v-shaped” recovery then took place which was followed by some short-term spikes as federal stimulus payments hit US households in 2021. However, growth rates have slowed significantly since mid-2022.

According to the latest “advance” numbers released by the US Census Bureau, total retail sales increased by just 0.1% in May. The result was less than the 0.3% increase which had been generally expected but it contrasted with April’s 0.3% fall after it was revised down from 0.0%. On an annual basis, the growth rate slowed from April’s revised rate of 2.7% to 2.3%.

“Retail sales increased less than expected in May, a sign that consumer spending, which has remained relatively resilient despite the high interest rate environment, softened in the spring,” said Westpac Business Bank Chief Economist Besa Deda.

The figures came out the same morning as the latest US industrial production numbers and US Treasury bond yields fell moderately across the curve on the day. By the close of business, the 2-year Treasury yield had lost 5bps to 4.72%, the 10-year yield had shed 6bps to 4.22% while the 30-year yield finished 5bps lower at 4.36%.

In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months firmed, with at least four 25bp cuts currently factored in. At the close of business, contracts implied the effective federal funds rate would average 5.30% in August, 3bps less than the current spot rate, 5.24% in September and 5.075% in November. June 2025 contracts implied 4.315%, 102bps less than the current rate.

Eight of the thirteen categories recorded higher sales over the month. The “Gasoline stations” segment provided the largest single influence on the overall result, falling by 2.2% over the month and contributing -0.17 percentage points to the total.  “Motor vehicle & parts dealers” and “Non-store retailer” sales also had large influences on the total, each rising by 0.8% and respectively contributing 0.16 percentage points and 0.14 percentage points..

The non-store segment includes vending machine sales, door-to-door sales and mail-order sales but nowadays this segment has become dominated by online sales. It accounts for around 17% of all US retail sales and it is the second-largest segment after vehicles and parts.

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US industrial output jumps in May

18 June 2024

Summary: US industrial output up 0.9% in May, greater than expected; up 0.4% over past 12 months; US Treasury yields fall; rate-cut expectations firm; capacity utilisation rate jumps to 78.7%.

The Federal Reserve’s industrial production (IP) index measures real output from manufacturing, mining, electricity and gas company facilities located in the United States. These sectors are thought to be sensitive to consumer demand and so some leading indicators of GDP use industrial production figures as a component. US production collapsed through March and April of 2020 before recovering the ground lost over the fifteen months to July 2021. However, production levels has largely stagnated since early 2022.

According to the Federal Reserve, US industrial production rose by 0.9% on a seasonally adjusted basis in May. The result was considerably greater than the 0.4% increase which had been generally expected as well as April’s unchanged figure. On an annual basis the growth rate moved back into positive territory, rising from April’s downwardly revised figure of -0.7% to 0.4%.

The figures came out the same morning as the latest US retail sales numbers and US Treasury bond yields fell moderately across the curve on the day. By the close of business, the 2-year Treasury yield had lost 5bps to 4.72%, the 10-year yield had shed 6bps to 4.22% while the 30-year yield finished 5bps lower at 4.36%.

In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months firmed, with at least four 25bp cuts currently factored in. At the close of business, contracts implied the effective federal funds rate would average 5.30% in August, 3bps less than the current spot rate, 5.24% in September and 5.075% in November. June 2025 contracts implied 4.315%, 102bps less than the current rate.

The same report includes capacity utilisation figures which are generally accepted as an indicator of future investment expenditure and/or inflationary pressures. Capacity usage hit a high for the last business cycle in early 2019 before it began a downtrend which ended with April 2020’s multi-decade low of 64.2%. May’s reading jumped by 0.5 percentage points after revisions to 78.7%, 1.4 percentage points below the long-term average.

While the US utilisation rate’s correlation with the US jobless rate is solid, it is not as high as the comparable correlation in Australia.

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Job ads down for fourth consecutive month in May

17 June 2024

Summary: Job ads down 2.1% in May; 18.1% lower than May 2023; ANZ labour market cooling but only gradually; ACGB yields fall; rate-cut expectations firm; Westpac: supports expectation of further gradual easing in labour market; ad index-to-workforce ratio slips.

From mid-2017 onwards, year-on-year growth rates in the total number of Australian job advertisements consistently exceeded 10%. That was until mid-2018 when the annual growth rate fell back markedly. 2019 was notable for its reduced employment advertising and this trend continued into the first quarter of 2020. Advertising then plunged in April and May of 2020 as pandemic restrictions took effect but recovered quite quickly, reaching historically-high levels in 2022.

According to the latest reading of the ANZ-Indeed Job Ads Index, total job advertisements in May decreased by 2.1% on a seasonally adjusted basis. The index fell from 123.0 in April after revisions to 120.5, with the loss following falls of 2.3% in April and 0.7% in March. On a 12-month basis, total job advertisements were 18.1% lower than in May 2023, down from April’s downwardly-revised figure of -16.2%. (Note: large revisions to early 2024 data.)

“The revised ANZ-Indeed Australian Job Ads series shows a softening over 2024, with an 8.2% fall since the end of last year,” said ANZ economist Madeline Dunk. “Other data also show the labour market is cooling but only gradually.”

Commonwealth Government bond yields fell modestly on the day with the exception of ultra-long yields which caught up from Friday’s lag. By the close of business, the 3-year ACGB yield had lost 2bps to 3.76%, the 10-year yield had slipped 1bp to 4.11% while the 20-year yield finished 7bps lower at 4.44%.

Expectations regarding rate cuts in the next twelve months firmed by the end of the day. In the cash futures market, contracts implied the cash rate would remain close to the current rate for the next few months and average 4.315% through June, 4.31% in July and 4.315% in August. However, November contracts implied 4.24%, February 2025 contracts implied 4.145% while May 2025 contracts implied 4.09%, 23bps less than the current cash rate.

“The continued pull-back in job ads supports our expectation of a further gradual easing in labour market conditions over the remainder of 2024,” said Westpac economist Jameson Coombs.

The inverse relationship between job advertisements and the unemployment rate has been quite strong (see below chart), although ANZ themselves called the relationship between the two series into question in early 2019. 

A higher job advertisement index as a proportion of the labour force is suggestive of lower unemployment rates in the near future while a lower ratio suggests higher unemployment rates will follow. May’s ad index-to-workforce ratio declined from 0.82 after revisions to 0.81.

In 2008/2009, advertisements plummeted and Australia’s unemployment rate jumped from 4% to nearly 6% over a period of 15 months. When a more dramatic fall in advertisements took place in April 2020, the unemployment rate responded much more quickly.

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UoM consumer sentiment slips again in June

14 June 2024

Summary: University of Michigan consumer confidence index falls in June, reading less than expected; views of present conditions, future conditions both deteriorate; few changes in economy from May; short-term Treasury yields rise, longer-term yields fall; fed funds rate-cut expectations firm.

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 remained at historically low levels through 2022 and 2023.

The latest survey conducted by the University indicates confidence among US households has deteriorated further in June. The preliminary reading of the Index of Consumer Sentiment registered 65.6, noticeably less than the 73.0 which had been generally expected and down from May’s final figure of 69.1.

Consumers’ views of current conditions and their views of future conditions both deteriorated relative to those held at the time of the May survey.

“Assessments of personal finances dipped, due to modestly rising concerns over high prices as well as weakening incomes,” said the University’s Surveys of Consumers Director Joanne Hsu. “Overall, consumers perceive few changes in the economy from May.”

Short-term US Treasury bond yields crept a little higher while longer-term yields fell on the day. By the close of business, the 2-year yield had added 1bp to 4.71%, the 10-year yield had lost 2bps to 4.22% while the 30-year yield finished 5bps lower at 4.35%.

In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months firmed, with at least four 25bp cuts currently factored in. At the close of business, contracts implied the effective federal funds rate would average 5.295% in August, 3bps less than the current spot rate, 5.23% in September and 5.05% in November. June 2025 contracts implied 4.29%, 104bps less than the current rate.

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.

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US PPI down 0.2%; consumer inflation “on way” to Fed target

13 June 2024

Summary: US producer price index (PPI) down 0.2% in May, contrasts with expected increase; annual rate slows to 2.2%; “core” PPI flat over month, up 2.3% over year; Westpac: adds weight to notion US consumer inflation on way to 2.0%; US Treasury yields fall noticeably; rate-cut expectations firm; ANZ: rough estimate for May core PCE is 0.1%; services prices flat, goods prices down 0.8%.

Around the end of 2018, the annual inflation rate of the US producer price index (PPI) began a downtrend which continued through 2019. Months in which producer prices increased suggested the trend may have been coming to an end, only for it to continue, culminating in a plunge in April 2020. Figures returned to “normal” towards the end of that year but then moved well above the long-term average in 2021 and 2022 before falling back over 2023.

The latest figures published by the Bureau of Labor Statistics indicate producer prices declined by 0.2% in May after seasonal adjustments. The result contrasted with the 0.1% increase which had been generally expected as well as April’s +0.5%. On a 12-month basis, the rate of producer price inflation after seasonal adjustments slowed from April’s upwardly-revised figure of 2.3% to 2.2%.

Producer prices excluding foods and energy, or “core” PPI, were unchanged after seasonal adjustments. The result was less than the 0.3% increase which had been generally expected and April’s 0.5% rise. The annual growth rate slowed from 2.4% to 2.3%.

“While not a strong lead for CPI or PCE inflation overall, coming a day after the better-than-expected May

CPI print, this result adds weight to the notion that US consumer inflation is on its way back to 2.0%,” said Westpac senior economist Pat Bustamante.

US Treasury bond yields fell noticeably along the curve on the day. By the close of business, the 2-year Treasury yield had lost 5bps to 4.70% while 10-year and 30-year yields both finished 8bps lower at 4.24% and 4.40% respectively.

In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months firmed, with at least four 25bp cuts currently factored in. At the close of business, contracts implied the effective federal funds rate would average 5.30% in August, 3bps less than the current spot rate, 5.235% in September and 5.065% in November. June 2025 contracts implied 4.315%, 102bps less than the current rate.

“Both the PPI and CPI inflation measures have elements that are used to calculate monthly PCE inflation,” said ANZ economist Jack Chambers. “Our back-of-the-envelope calculations estimate May core PCE rose in the region of 0.1%, or possibly a touch lower. 0.1% m/m would leave the annual measure of May core PCE inflation at 2.56%, down from 2.75% in April.”

The BLS stated the fall of the index was attributable to a 0.8% decrease in goods prices. The final demand services index remained unchanged.

The producer price index is a measure of prices received by producers for domestically produced goods, services and construction. It is put together in a fashion similar to the consumer price index (CPI) except it measures prices received from the producer’s perspective rather than from the perspective of a retailer or a consumer. It is another one of the various measures of inflation tracked by the US Fed, along with core personal consumption expenditure (PCE) price data. 

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