Consumer sentiment slips, inflation expectations remain elevated

Key economic releases

Although it was a relatively light week, there were several conflicting reports to digest. Both the Empire State Manufacturing Index and the Philadelphia Fed Manufacturing Index were positive on the month, finally showing signs that manufacturing in the U.S. is starting to turn up. This was also confirmed by the S&P flash report, with a manufacturing index reading of 51.6. However, the S&P services flash fell sharply to 49.7, which is the lowest level since January 2023. Additionally, there were some negative surprises when looking at housing (both starts and existing home sales down sharply), builder sentiment (index reading of 42 down from 47), and consumer sentiment (final reading of 64.7 down from the flash reading of 68 earlier in the month). Harsh weather, concerns over potential tariffs, and lingering inflation likely contributed to some of these negative readings, but investors should continue monitoring for signs on where the economy may be headed.

Inflation concerns continue to weigh on investors’ minds. The Federal Open Market Committee (FOMC) meeting minutes released last week did not assuage any of those concerns, with many members stating that they needed to see further progress before they would be open to lowering rates further. Some FOMC members also noted tariffs were likely to impede that progress. Inflation is also on the mind of consumers with the year-ahead inflation expectations in the final reading of consumer sentiment at 4.3%.

Last week’s reports highlighted that the consumer may be slowing while inflation remains sticky, a scenario that does not bode well for the overall economy. However, extrapolating too much on a single report is not prudent. It’s likely we will see more volatility in the coming months as we wait for more clarity on fiscal policy, the health of the consumer, and inflation.

Markets response to news

Since the U.S. presidential election on November 5, 2024, Washington has generated a steady stream of headlines, including Cabinet selections, tariff policy, immigration, taxes, and the Russia-Ukraine war. As news comes out, markets typically overreact to the initial report and then price in the actual impacts in the coming hours. While it can feel like a whirlwind on any given week, taking a longer-term perspective can be helpful.

Since the presidential election, the 10-year Treasury yield is up 13 bps and the S&P is up 4%. Following the headlines does not reflect the returns observed in the markets as there are so many other factors at play. Investors are typically rewarded when paying closer attention to the fundamental drivers of returns, rather than the news on any given day/week.

The week ahead

This week investors will get more insight into consumer trends and inflation with the release of durable goods, revised GDP, and the PCE Index.