Expande Economy (PMI), But Consumer Sinks in Pessimism (Michigan) and Expectations of Caem Inflation – The Dilemma of the EDF Go on

[Igor Pereira]

We have just received a battery of crucial economic data from the US that paint a picture of deep contradiction. On one side, the PMIs show that general economic activity is still expanding. On the other, the Consumer Feeling of the University of Michigan It has fallen, reaching alarming levels of pessimism.

By Igor Pereira, Financial Market Analyst, Junior Member WallStreet NYSE

To add to complexity, Consumer inflation expectations have fallen, which can ease the pressure on the EDF. Let's dissect these numbers and their implications.

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1. The Resilient Economy: MIPs Still on Expansion

Preliminary data from S&P PMI for November show that the US economy continues to grow, although with some nuances:

• S&P Composite PMI: It went up slightly to 54.8 (of 54.6), indicating a solid general expansion (above 50).

• S&P Services PMI: The service sector, the engine of the economy, has accelerated to 55 (of 54.8).

• S&P Manufacturing PMI: The manufacturing sector, however, slowed down to 51.9 (of 52.5), although it remains in expanding territory.

My Analysis (Igor Pereira): These MIP data suggest that despite the fears of recession, business activity has not yet collapsed. The service sector continues to hold the economy, compensating for weaker manufacturing.

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2. Consumer in Panic: Michigan's Feeling Loses

In direct contrast to the MIPs, the University of Michigan Consumer Feeling dropped sharply:

• Michigan Consumer Sentiment: Fell to 51 (of 53.6), although slightly above the 50.3.

My Analysis: A reading of 51 is extremely low, historically associated with periods of recession. This shows that the American consumer, who drives 70% of the economy, is deeply pessimistic about his finances and the economic future. The discrepancy between what shopping managers see (expansion) and what consumers feel (crisis) is the nerve point.

3. The Good News for the EDF: Expectations of Caem Inflation

One positive point in the Michigan report was the fall in consumer inflation expectations:

• Expectation of 1 Year: Fell to +4.5% (of +4.6%), below expectations.

• 5 Years Expectation: It dropped significantly to +3.4% (from +3.9%), also below expectations.

My Analysis: This is the news the EDF wanted to hear. The fall in long-term inflation expectations (5 years) suggests that consumers are not seeing an inflationary spiral out of control. That gives the EDF more leeway to consider interest cuts to combat economic weakness and consumer pessimism, without the immediate fear of defiling inflation expectations.

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Conclusion of Igor Pereira: The Way to the Court of Interest Opens

Today's data combination is, in the final balance sheet, dovish (favorable to interest cuts).

• The resilience of MIPs is positive, but the dramatic fall in consumer sentiment is a warning signal that the EDF cannot ignore.

• The fall in inflation expectations removes a key obstacle for the EDF to act.

Williams from the Fed of New York already signaled yesterday's concern for the labor market. Today's data, showing a pessimistic consumer and inflation expected to fall, reinforce the thesis that an interest cut in December (or very soon) is necessary to prevent pessimism from turning into a real recession.

Market Implications:

• Dollar (USD): The fall in inflation expectations and the weak consumer feeling are negative for the dollar.

• Gold (XAU/USD): This is a positive scenario for gold. An EDF with more space to cut interest amid a pessimistic consumer is the ideal environment for refuge assets.

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