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U.S. Consumer Confidence Continues to Deteriorate, Will It Make New Lows?

Affected by the rising inflation, the confidence of US consumers has been falling, raising concerns among investors regarding the upcoming US Conference Board Consumer Confidence Index for March set to be released tonight. The US Consumer Confidence Index in February was higher than the data from January. However, it fell sharply by more than 10 points to 110.5. The University of Michigan's consumer confidence index released recently came in at 59.4 in March. The market expectations were to maintain the initial value of 59.7. This figure was also much lower than the final value of 62.8 in February.


Still, some economists believe that the persistent slump in the University of Michigan sentiment index is excessive relative to fundamentals, and they expect the economy to keep growing. For example, the number of Americans filing for unemployment benefits is at a 52-year low and wages are growing strongly. Therefore, tonight's data will be a crucial focus for investors as they watch to see if consumer confidence will hit a new low.


Inflation Is the Main Reason Behind the Low Consumer Confidence

Inflation is a key factor affecting consumer confidence. It is now clear that the inflation level in the United States is still soaring, and it appears that inflation has not yet peaked. Whether it is the energy, food, and housing costs, it is worth mentioning that the housing market will see a slight rise. However, U.S. home sales in February fell 4.1% from January to 104.9, the lowest level since May 2020, which also reflects the gloomy consumer sentiment.


On February 10, data released by the U.S. Department of Labor showed that the unseasonally adjusted U.S. CPI in January 2022 rose by 7.5% on an annualized basis, hitting a 40-year high. It was also the second consecutive time that U.S. monthly consumer price index (CPI) has exceeded 7%. The gasoline index rose 6.6% month-on-month in February, accounting for almost one-third of the increase; the food index rose 1.4%, the most significant month-on-month increase since April 2020.


Before the Russian-Ukrainian war, energy prices in the United States were already at record highs. The outbreak of the war intensified inflation in the United States and continued to push up the already high energy prices. Moreover, analysts initially expected U.S. inflation to peak in February. Now it seems that they will have to push back the timeline, as the inflation level may continue rising. The survey showed that the final value of US consumers' inflation expectations for the next year was 5.4%.


As the inflation rate remains high, the market expects the Fed to raise interest rates more times. Goldman Sachs has raised its U.S. inflation forecast, and it expects the Fed to raise interest rates as many as 11 times this year and the next. Moreover, Goldman Sachs’ report said that if a sudden change in the Ukraine situation triggers higher energy prices or further supply chain disruptions, future U.S. inflation expectations could be raised again.


Will Consumer Spending Be Affected?

As the upward inflationary pressures continue, the blow to consumer confidence will remain. So, will the downturn in consumer confidence affect consumer spending? Judging from the current situation, U.S. consumers have low spending and high savings rate after accumulating more than $2.5 trillion in excess savings during the pandemic. At the same time, the labor market is recovering strongly. For example, the number of people receiving unemployment benefits in the United States hit a new low, last seen more than half a century ago in March, which is a positive factor to ease the impact of inflation.


Although rising inflation has squeezed the purchasing power of consumers, the domestic demand for goods in the United States has generally remained strong, and the economic growth momentum still exists. The impact of sluggish market sentiment on consumer spending will not be great for the time being. Fourth-quarter results at the end of the month still beat market expectations.


Judging from the University of Michigan sentiment index, the U.S. Conference Board consumer confidence data for March to be released tonight may be relatively negative, especially as the Russian-Ukrainian war continues to put upward pressure on oil prices. Therefore, the market needs to pay close attention to the possible negative impact of the consumer sentiment index on US stocks. If it is lower than the expected value of 107, it may further dampen investor confidence.

Last Updated: 29/03/2022

This market commentary and analysis has been prepared for ATFX by a third party for general information purposes only. Any view expressed does not constitute a personal recommendation or solicitation to buy or sell as it does not take into account your personal circumstances or objectives, and should therefore not be interpreted as financial, investment or other advice, or relied upon as such. You should therefore seek independent advice before making any investment decisions. This information has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. We aim to establish and maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps to prevent conflicts of interest from constituting or giving rise to a material risk of damage to the interests of our clients. The market data is derived from independent sources believed to be reliable, however we make no representation or warranty of its accuracy or completeness, and accept no responsibility for any consequence of its use by recipients. Reproduction of this information, in whole or in part, is not permitted.


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