Consumer Sentiment Bounces Higher

Consumer sentiment bounced sharply higher in October, to a much stronger-than-expected 96.0 that easily exceeds Econoday's consensus range. The assessment of current conditions is the strong point in October's report, up nearly 5 points to 113.4 in what is a positive indication for consumer spending this month. Expectations are also higher, up 1.4 points to 84.8 and together with the jump in current conditions, suggest that the impeachment inquiry of President Trump is not having a significant impact on the consumer. In fact, the report notes that the ongoing GM strike was mentioned by respondents nearly twice as much as the impeachment.

Also of note is that consumers see higher income gains at the same time that they see inflation on the decline, a combination that points to gains for real income where expectations are now at a two decade high. Yet the decline in inflation expectations will not be a positive at all for the Federal Reserve especially when they see a 3 tenths drop in year-ahead expectations to 2.5 percent and a 2 tenths drop in 5-year expectations to 2.2 percent. Both of these readings are unusually low and will raise talk that inflation expectations, Jerome Powell's central focus when it comes to achieving price goals, may be at risk of becoming unanchored.

Despite the headline gain for the index, sentiment is still below where it was in July and well below its peak in May at 100 which was about when US trade tensions with China, among others, began to escalate. For monetary policy, any bounce higher in consumer sentiment and along with it spending is likely to be more than offset by the decline in inflation expectations, a combination that on net favors the doves and their push for further rate cuts.