University Of Michigan Consumer Sentiment Plummets In May, Inflation Expectations Stay Elevated

The preliminary estimates for the University of Michigan consumer sentiment index as high interest rates and persistent price pressures wreak havoc on U.S. consumer morale. 

The index estimate released Friday sharply dropped from 63.5 in April to 57 in May, marking a 9.1% monthly decrease and falling short of the expected 63 reading. 

Consumers' concerns about the economy grew notably in May, coinciding with the diffusion of unfavorable economic news, especially the debt ceiling crisis.

Highlights From May UMich Report:

• Current economic conditions index dropped from 68.6 in April to 64.5 in May, down 5.4%. 
• The index of consumer expectations rose from 60.5 in April to 53.4 in May, down 11.7%. 
• The year-ahead inflation expectations eased only marginally to 4.5% after spiking 4.6%, highlighting that uncertainty over the inflation trajectory continues to be notably elevated.
• Long-run inflation expectations rose from 3% in April to 3.2% in May. 
• According to Surveys of Consumers Director Joanne Hsu, the consumer sentiment "erased over half of the gains achieved after the all-time historic low from last June." "After two years of relative stability, long-run inflation expectations rose to their highest reading since 2011, lifting from 3.0% last month to 3.2% this month," Hsu added. 

Market Reactions: The SPDR S&P 500 ETF Trust SPY, which replicates the S&P 500 index, dropped 0.2% after the release of the consumer confidence gauge on Friday. 

Treasury yields were broadly stable, with the 10-year benchmark Treasury bond yield at 3.4% and the two-year yield at 3.93%.

Traders are almost fully pricing in the Fed keeping interest rates steady in June, while a rate cut is fully priced to occur at the September 2023 meeting, according to CME Group Fedwatch tool. 

Benzinga's Take: Consumer confidence in the United States slumped in May, indicating that consumers are feeling less confident about the economy as underlying inflation and interest rates remain high.
Rising inflation expectations are a red flag for the Federal Reserve and may prompt policymakers to re-anchor inflation expectations by maintaining elevated interest rates for an extended period of time even if the economy slows. 

Read now: Debt Ceiling Standoff Ending Will Push Fed To Restart Quantitative Easing, Analyst Says

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