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The Public’s Confidence in the Economy May Put Equites at Risk

By:Ilya Spivak

Relative optimism undermines the case for rapid interest rate cuts

  • A key survey is set to show U.S. consumer confidence is well-supported in January.
  • The two-month rebound in sentiment is driven by expectations for a decline in inflation.
  • Stocks and bonds are at risk if the cheery data eats into Fed rate cut speculation.

A gauge of U.S. consumer confidence from the University of Michigan (UofM) is expected to show a relatively upbeat picture in January. Survey respondents’ assessment of current economic conditions and their trajectory over the coming months is seen as similar to the four-month highs recorded in December.

The report’s closely watched inflation expectations metrics seem likewise encouraging. The one-year price growth outlook is seen holding steady at 3.1% while the five-year view idles at 2.9%. That would sustain for another month December’s vast improvement from November’s heady readings.

U.S. consumers cheer as inflation expectations cool

Last month’s report assessed the situation unambiguously: “Consumer sentiment soared [in] December, erasing all declines from the previous four months, primarily on the basis of improvements in the expected trajectory of inflation.” More of the same in January seems like welcome news for an economy overwhelmingly powered by consumption.

University of Michigan U.S. consumer confidence survey
Source: University of Michigan

Analytics from Citigroup show that U.S. economic data outcomes have converged on analysts’ baseline expectations over recent months. That seems to imply incoming results are likely to hew relatively closely to the consensus view, meaning the UofM report will probably paint a broadly benign picture.

It would echo the message on display in leading purchasing managers’ index (PMI) data, a timelier assessment of the business cycle than perennially lagged gross domestic product (GDP) figures. It reflects a “slow and steady” U.S. economy that has managed to avoid contraction despite deceleration to a near-standstill in the second half of 2023.

Fed interest rate cuts: How many is too many?

This raises an important question for Federal Reserve officials and the traders who watch their every move: Which part of this story demands that the central bank deliver a blistering interest rate cut cycle? As it stands, the markets are pricing in five 25-basis-point (bps) cuts in 2024, with a better-than-even 68% chance of a sixth.

The upswell in rate cut bets was the catalyst powering blistering rallies in stocks and bonds in November and December. Both moves have now stalled as the markets ponder next steps. If U.S. consumer confidence seems well-supported, the case for rapid easing may look less plausible and nudge the markets downward.

Futures-implied FOMC outlook vs. S&P 500
Source: CME

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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