Low Consumer Sentiment and Price Pressures Put Fed Rate Cuts on Hold

By the Curmudgeon with Victor Sperandeo

U.S. Consumer Sentiment at All-Time Low:

Consumer sentiment from the University of Michigan fell sharply in its preliminary April reading dropping from 53.3 to 47.6. The Overall Index and Current Conditions Index fell to the lowest levels on record, while the Future Expectations Index has only been lower in late 1979 and early 1980, just before the double dip recession.

In addition to record low sentiment, this report also showed inflation expectations for the year ahead, increasing to 4.8% from 3.8%. While much of this month’s move is likely due to the Iran conflict, Consumer Sentiment was near historic lows prior to the start of the war, and it will take time for consumers to feel confident in their personal finances again – especially as they grapple with rising prices.

Respondents reported the weakest perception of their personal financial situation since 1951—surpassing the pessimism seen during the Great Financial Crisis and other historic shocks, including the Vietnam War, Black Monday, and the double-digit inflation era of the early 1980s.

Joanne Hsu, University of Michigan Survey of Consumers Director wrote:

"Demographic groups across age, income, and political party all posted setbacks in sentiment, as did every component of the index, reflecting the widespread nature of this month’s fall."

Importantly, the April data were collected before the announcement of a temporary ceasefire in the Iran war. Sentiment may improve if geopolitical tensions ease, but confidence had already deteriorated prior to the conflict, signaling broader structural concerns. Households continue to cite persistent inflationary pressures and declining asset values as key headwinds—factors that could restrain consumption.

Since consumer spending represents roughly 70% of U.S. GDP, sustained weakness in sentiment poses downside risks to near-term economic growth and equity market performance.

Hot Inflation Readings:

To add to U.S. consumer miseries, inflation is increasing and likely to get worse.

Two Institute for Supply Management (ISM) surveys, released in the first week of April, showed that both manufacturing and services sectors have experienced accelerating price pressures. Executives noted steep cost increases that could foreshadow an increase in inflation, which is already above the Federal Reserve’s 2% target. Should inflationary trends intensify, the Fed will likely focus more on price stability, limiting the prospects for rate cuts in the coming months (more below).

Meanwhile, the March CPI rose 0.9% monthly, hitting 3.3% annually due to surging energy costs. The February PCE, the Fed’s preferred inflation gauge, rose 0.4% (2.8% annually), with "core" PCE (excluding food/energy) up 3.0% annually, indicating continued inflationary pressure.

To make matters worse, elevated energy prices stemming from the Iran conflict and the effective closure of the Strait of Hormuz introduce additional inflationary risk.

Cartoon Courtesy of Hedgeye

This combination of geopolitical volatility and resurgent cost pressures could prompt the Fed to consider rate hikes later this summer or fall, challenging market expectations for easing and potentially tightening financial conditions across the yield curve.

From a financial market perspective, weak consumer sentiment often results in softer consumption and lower economic growth. The high and “sticky” inflation numbers indicate a pressured consumer that may cause sentiment and spending to deteriorate further.

Such a “stagflation” scenario increases the odds that the Federal Reserve will focus more on its price-stability mandate, which would delay rate cuts and keep yields “higher for longer” than most expect.

The CME Fed Watch Tool shows the majority of 30 day Fed Futures traders expect the target Fed Funds rate to remain at 350-375 bps through the July 28, 2027 FOMC meeting! A sizable number of traders expect a RATE INCREASE before then.

Victor’s Comments:

Consumer sentiment is like a stock’s P/E ratio, because it reflects the true psychology of the people. Very low sentiment depicts a negative view of what the public thinks of current economic conditions, without interference from White House hype or news media propaganda machines.

Fearful consumer views of the future are well founded in light of the UNEXPECTED U.S. WAR WITH IRAN AND ITS EFFECTS ON OIL PRICES.

Also, the Fed is not likely to backstop the negative consequences of a deteriorating U.S. economy due to the feud with President Trump, who has repeatedly threatened the Fed’s independence by urging them to lower rates.

There are many more U.S. economic problems that are being “swept under the rug:”

l Private Credit issues are much more negative than reported due to a lack of transparency and huge losses.

l The labor market is showing clear signs of deterioration with a declining labor force participation rate.

l Weakness of the U.S. bond and fixed income markets which are the foundation of the U.S. economic and fiat currency system.

l Gold markets are foreshadowing a “deflationary, recessionary story.”

-->Mark my words: the U.S. is already in recession.

Victor’s Market Positioning and Conclusions:

What’s holding up the U.S. equity markets are strong earnings forecasts which are not being lowered. They will be shortly in my view!

I am still long 5-year notes and gold +silver as an investor, I also have a small number of U.S. equity market puts.

President Trump’s on again, off again war with Iran is whipping markets around to such a degree that all but day traders are going to be forced to the sidelines. It’s best to NOT trade during Trump’s whimsical and narcissistic mental conditions.

Good luck to America…………………………

End Quote:

"People are supposed to fear the unknown, but ignorance is bliss when knowledge is so damn frightening.” - Laurell K. Hamilton

Laurell K. Hamilton is the author of two major book series, spin-off comic books, various anthologies, and other stand-alone titles.

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Wishing you good health, success, and good luck. Till next time……………

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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