Consumer Trust Drops and Inflation Expectation Up – The Fed Nightmare

[Igor Pereira]

We have just received the final December data from the University of Michigan (UMich), and the result draws the most difficult scenario possible for the American Central Bank: an economy losing traction as fear of inflation grows again.

By Igor Pereira Financial Market Analyst

This is the classic sign of "Stagflation" (stopped economy + high inflation) that the market fears so much. Below, I detailed the numbers and how it affects your operations.

• Consumer Feeling (Dec Final): 52.9 (Under the Forecast of 53.5 and Previous 53.3).

  • Reading: The American consumer is more pessimistic. Levels close to 50 are historically associated with deep recessions. This validates the high unemployment data (4.6%) that we have seen before.

• Inflation Expectation (1 Year): 4.2 % (Over the forecast of 4.1%).

  • Reading: Although the "official" CPI fell to 2.6% (with those statistical distortions we explained), the actual public on the streets doesn't believe in falling prices. They expect inflation to rise to 4.2% next year.

• Inflation Expectation (5-10 Years): 3.2 % (In line with expected).

  • Reading: Long-term expectations remain unhinged, well above the Fed's 2% target.

The Dilemma of the Federal Reserve

These data put the Fed in a "beaky pool":

1. The economy asks for interest cuts: With the feeling falling to 52.9 and unemployment rising, the Fed would need to stimulate the economy by cutting interest urgently.

2. Inflation prevents relief: With inflation expectations rising to 4.2%, cutting interest now could cause prices to explode again, completely losing credibility.

For us at ExpertFX, the correlation is clear:

• Gold (XAU/USD):Gold loves stagflation. If the economy slows down (bad for shares) but inflation persists (bad for cash in cash), capital flees to real protection assets. The divergence between what the government says (low CPI) and what the people feel (high Expectation) generates distrust in the Dollar.

• Dollar (DXY): Volatile/Mixed. The Dollar may have high peaks due to interest (yields) that insist on not falling, but the weakness of the economy (feeling 52.9) limits any sustainable rally.

• Indexes (S&P500/Nasdaq): Downstairs. The consumer is the engine of American GDP. If he is stopping spending (low confidence) and expects higher prices, the profit margins of the companies will be crushed.

Don't operate against sentiment data. The real economy is screaming that there are problems, even if the newspaper headlines try to soften.

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By Igor Pereira Financial Market Analyst