Consumer Sentiment Leaps, but High Inflation Limits Recovery, Dollar Maintains Gains

CONSUMER SENTIMENT KEY POINTS:

• April consumer sentiment rises to 65.7 from 59.4 in March, topping market expectations
• Soaring consumer prices in the U.S. economy limits the recovery in confidence
• The U.S. dollar maintains gains after the survey results cross the wire, with the strong advance being sparked by the dovish ECB

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Consumer sentiment unexpectedly rebounded in early April, but the recovery was limited, as four-decade high inflation continued to erode household spending and real income, undermining confidence in personal finances and, to some extent, the economy as a whole. According to preliminary results from the University of Michigan, its consumer sentiment index rose to 65.7 at mid-month from 59.4 in February. The median forecast of economists in a Bloomberg News poll called for a decline to 59.

In the last several months, inflation has been the main source of consternation for most Americans, as the rising cost of living has had an injurious effect on people’s financial fortunes, creating widespread public discontent and resentment towards some of the government’s economic policies.

Drilling down into the survey’s results, the economic conditions indicator climbed to 68.1 from 67.2, while the expectations index jumped to 64.1 from 54.3 on hopes the labor market will strengthen and lift wages. When it comes to inflation expectations, the one-year gauge remained at 5.4%, while the five-year outlook stayed anchored at 3%.

With the modest bounce in April, the sentiment index remained stuck at crisis levels, but it is important to underscore one point: people do not always act as they feel, meaning that lackluster numbers may not necessarily translate to less consumption. We have witnessed this curious phenomenon recently. For example, confidence has been in a relentless downtrend since May of last year, but despite the steep decline, Americans have not tightened their wallets, far from it; consumer spending has been robust for most of this period amid excess savings and strong labor market.

Still, the depressed consumer sentiment is cause for concern considering that household consumption accounts for approximately 70% of U.S. GDP. However, the excessive pessimism seems overdone relative to economic fundamentals, a situation that raises the question of whether the country’s extreme partisan divide is contributing to the deteriorating mood. In any case, one thing is now clear: some soft data may have lost the predictive power they once had, so they should be taken with a grain of salt when used to make broad assumptions about the economic outlook.

After the University of Michigan survey crossed the wires, the U.S. dollar, as measured by the DXY index, maintained its advance, rising roughly 0.7% to 100.1, its highest level since April 2020. However, the upswing is linked to the ECB’s dovish stance at its April monetary policy meeting, rather than U.S. data.

US DOLLAR INDEX 10-MINUTE CHART

Source: TradingView

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—Written by Diego Colman, Contributor