Scott Mlyn |: CNBC:
Oh boy! We didn’t get a good data point this morning. And you probably won’t hear much about it, but it is crucial data point for the Fed.
We just got the preliminary consumer sentiment reading from the University of Michigan at 10 a.m. ET, and at first glance it looks promising; “surprised” sentiment jumped five points to a reading of nearly 65. Remember, this figure hit record low in mid-June as pump prices rose to all-time highs.
So, naturally, consumer sentiment is recovering as gasoline prices have come down. The problem? Inflation expectations are also recovering. And not anytime soon, which is most sensitive to food and energy costs. The longer-term ones that tell the Fed that inflation is in danger of becoming entrenched.
The scariest data point for the Fed, I would argue, is what U.S. consumers think inflation will look like over the next five to ten years—that is, what they think will be “normal.” In today’s report, it rose to 3 percent, the highest since gasoline prices peaked in June last year. That’s right–Consumers today, after what has happened in recent months and with talk of a looming recession, have as high a view of “normal” future inflation as they did in June, when prices were still rising..
I haven’t seen the Fed futures markets yet, but savvy investors should be very concerned about this if they were hoping for a faster Fed stop or smaller and fewer hikes. Recall that the first time the Fed raised interest rates by 75 basis points was last year on Wednesday, when this same report showed a jump in long-term consumer inflation expectations.
It’s true that we got a very bad CPI report on Friday, June 10, but 90 minutes later we too got a very bad sentiment report showing long-term inflation expectations rising to 3.3% (I wrote about it here). That afternoon, I said I wouldn’t be surprised if the Fed hiked to 75 basis points at the upcoming meeting, which is exactly what they telegraphed to The Wall Street Journal that weekend, followed by the first. Four rate hikes of 75 basis points will end on June 15.
If you wanted the Fed to stop now, you should have seen today’s reading show a big drop in long-term expectations to 2.5%. That obviously did not happen. We saw similar persistence in the New York Fed’s own survey released earlier this week, which showed three-year expectations still at 3% and five-year expectations. a rose one-tenth to 2.4%.
So our Steve Lisman is quite right in his report today that, as far as the markets are concerned, “Fed strikes will continue” in the form of additional rate hikes. Which is too bad, as I would put it way The outlook for the bond market signals more certainty of a collapse than I would like in these “overwhelming” consumer reports.
But the Fed has decades of research and empirical work on how inflation expectations are one of the main ways to affect future actual inflation, and Fed officials talk about it all the time. What we don’t hear much about is their research on how bond futures markets are excellent predictors of GDP, which itself can be a dominant factor in how employment and inflation behave over time.
That’s the best the Bulls can hope for consumersInflation expectations are collapsing in the coming months as much as the bond market already is. This week’s data suggests they shouldn’t hold their breath.
See you at 13:00.