Despite sky-high inflation and dampened outlook for the U.S. economy, The Conference Board’s consumer confidence index posted an unexpected rise in March. Consumer confidence, which is an indicator that helps predict recessions, was largely expected to post another down month. 💡
This unexpected rise in confidence contradicts the market’s outlook, which is leaning towards a recession. We’ve reported that the bond yield curve is flattening, approaching inversion in the mid-term (3-7 years). That inversion typically means investors anticipate a recession in the coming period.
Today, the 2-year Treasury yield surpassed the 10-year yield, meaning short-term interest rates are rising above long-term rates (increasing short-term rates reflect poor long-term market sentiment, meaning investors are losing confidence in the future of the U.S. market.) When investors begin to worry about recessions, they purchase long-term Treasury securities with expectations that those securities will be more valuable after the economy returns to normal.
However, as U.S. consumer confidence looked strong in The Conference Board’s report this month, a case could be made that investor bearishness might be overrated. 🤔 The confidence figure reached 107.2, higher than the 105.7 it posted in February — this increase is a sign that healthy jobs numbers, the end of mask mandates, and decreased unemployment are carrying more weight than inflation and war fears. About 500,000 jobs were added this month as unemployment dipped to 3.7%. 📈
That being said, 40-year inflation highs are still worrying consumers. According to The Conference Board, those surveyed think inflation will increase to 7.9%. The Conference Board’s expectations index measuring 6-month sentiment on economic conditions also lowered to 76.6, an 8-year low. 👎
These points deserve emphasis because a) inflation is likely to go a lot higher if these “hot” energy prices stick and b) the index of expectations (aka outlook) on consumer confidence is worrisome because it implies that consumers are concerned about the future.
In summary, consumers are more optimistic right now than investors expected, consumers are worried about the days ahead, and investors are pricing in a recession. 😪 Consumers might be wrong… the days ahead could be great. However, a yield curve has come before each recessionary period since 1956. Analysts think it’s too early to say what’s in store, especially because the U.S.’s yield curve has demonstrated a flattening pattern throughout 2022. It still isn’t completely inverted.