University Of Michigan's May Consumer Sentiment Forecast: Inflation Concerns Threaten Market Sectors

On Friday, May 12, at 10 a.m. ET, the University of Michigan will release the preliminary estimate of the May Consumer Sentiment Index.  The consensus among economists forecasts a marginal drop in the consumer sentiment indicator from 63.5 in April to 63 in May. 
University of Michigan Consumer Sentiment For May: Why It Matters

• The consumer sentiment barometer rose 2.4% month on month to 63.5 in April, above forecasts of 62. The preliminary May report comes as the consumer price index slowed more than expected last month (4.9% vs 5%) and unemployment claims increased more than expected in the week ending May 6 (262,000 vs 245,000). As a result, it will be critical to examine how the newest economic data has affected US consumer confidence.
• The April data showed a significant increase in year-ahead consumer inflation forecasts, rising from 3.6% to 4.6%. This will be an important subindex to monitor as the Federal Reserve remains wary of a jump in household inflation expectations. 
• So far, the trend in consumer sentiment has been inversely related to the change in the consumer price index. The rise in the CPI inflation rate between 2020 and June 2022 went hand-in-hand with the steep decline in the UMich consumer sentiment.
• The consumer sentiment gauge bottomed out at 50 in June 2022, when the CPI inflation rate peaked at 9.10%.

Chart: UMich vs US CPI Rate 

Benzinga's Take:

An increase in the consumer sentiment would be good news for the broader stock market, particularly for growth-oriented sectors such as the Consumer Discretionary Select Sector SPDR Fund XLY, the Communication Services Select Sector SPDR Fund XLC, and the Technology Select Sector SPDR Fund XLK.

However, if consumer inflation expectations rise, investors may begin to doubt the Fed's capacity to keep rates constant or drop them soon, which might have a negative impact on such sectors.

A drop in the consumer sentiment would be interpreted as a sign of slowing demand, weighing on cyclical sectors such as the Financial Select Sector SPDR Fund XLF and the Energy Select Sector SPDR Fund XLE while favoring more defensive sectors such as the Consumer Staples Select Sector SPDR Fund XLP and the Utilities Select Sector SPDR Fund XLU.

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