Consumers Are at 46.3, Near a Record Low. Stocks Are Near Highs. Someone Is Wrong.

Quick take: Wall Street is edging higher on Friday, but the University of Michigan just reported that American households feel worse than almost any time on record. The gap between a buoyant market and a gloomy consumer is the real story going into next week’s inflation data.

What happened

The preliminary October consumer sentiment index came in at 46.3, down from 48.1 in September and below the 47.6 economists expected. Only May’s 44.8 was lower, making it the second-weakest reading in the survey’s history. The current-conditions gauge fell to 44.7, a record low, while the expectations gauge ticked up to 47.3 from 46.3.

Prices are doing the damage. The survey’s director described expectations as largely stagflationary. Gasoline averaged about $2.93 a gallon before the Iran conflict; the AAA national average was $4.37 on Friday, roughly 40.5% above a year ago. In the survey, 54% of consumers said they plan to cut back on items with large price increases and 16% plan to stop buying them.

Why it matters

Inflation expectations rose too: 1-year at 4.7% (from 4.6%) and 5-year at 3.5% (from 3.4%). That matters because the Federal Reserve raised its policy rate by 25 basis points on September 16, to 3.75%-4.00%, in a unanimous 12-0 vote, its first hike since July 2023. Officials’ median projection pointed to one more hike this year. Sticky expectations make it harder for the Fed to argue that inflation pressure is fading.

The split between households is striking. Per the survey, sentiment has dropped about 25% since January among people without stock holdings, versus about 7% among the top third of stockholders. Rising equity prices appear to be cushioning one group far more than the other, which may explain how indexes and sentiment can diverge.

Key numbers

Michigan sentiment: 46.3 (prior 48.1, forecast 47.6)
1-year inflation expectation: 4.7%; 5-year: 3.5%
10-year Treasury yield: about 5.27%; 2-year about 4.81%; 30-year about 5.63%
S&P 500: about 7,788 (+0.3%) at the time of the report
Fed funds futures: about 21% chance of a hike on October 28, up from 18%
August CPI: 3.4% year over year; September consensus reported near 3.7%

What to watch next

First, the September CPI report on Wednesday, October 14 at 8:30 a.m. ET. Forecasts for headline inflation sit around 3.6%-3.7% year over year, while core is expected near 2.4%. A hot print could lift the odds of an October hike; a cool one would support the case for a pause. Second, the start of bank earnings on Tuesday, which will show how lenders see the consumer. Third, whether long yields, now above 5%, keep climbing and weigh on valuations.

Impact on Indian markets

Higher-for-longer US rates and a 5%-plus Treasury yield tend to pull foreign money toward the US and pressure emerging-market currencies and flows, which is a relevant backdrop given the heavy FII selling noted in Indian markets this week. Weak US consumers can also hit demand for Indian IT services. A softer CPI would likely ease that pressure.

Sources

Disclaimer: This post is for educational and informational purposes only and is not investment advice. Consult a licensed financial advisor before investing.

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