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The key question traders will now be asking following the prelim Michigan Sentiment is whether inflation expectations have topped out.
It was interesting to see that all metrics including current conditions and expectations came in above market expectations. The decline from last month may well have been merely a blip after all. The consumer remains a crucial aspect of the US economy (around 70% of GDP), so confidence metrics coming in above expectations will be encouraging for the Fed.
However, the intriguing takeaway is the drop in consumer inflation expectations on both a 1year and 5 year basis. It is important to note that this is just one month, but if these expectations continue lower next month, then it would be a signal for the Federal Reserve to take note of.
With spiking inflation indicators in recent months, the fear is that the consumer would bake this into their expectations. However, if expectations are now falling away this will play to the belief on the FOMC that inflation could simply be “transitory”.
Given the dovish ECB policy stance, anything that hints at normalising the spike in US inflation will help to support the dollar. With Treasury yields initially picking and more importantly real yields higher too, we see the Michigan Sentiment data set as broadly USD supportive.
DATA: 16:00 *(US) JUN PRELIMINARY UNIVERSITY OF MICHIGAN CONFIDENCE: 86.4 V 84.4E - Current conditions: 90.6 v 91.3e - Expectations: 83.8 v 78.7e - 1-year inflation expectations: 4.0% v 4.7%e- 5-10 year inflation expectations 2.8% v 3.1% prior -
Related ( EUR/USD USD/JPY JPY/USD TLT IEF SHY INFLUXDXY ).
