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According to the University of Michigan Consumer Sentiment Index, US consumer sentiment shot up by more than expected in February following the end of the partial shutdown of the US government and the Federal Reserve signaling that it would be lenient with interest rate hikes for 2019.

Key Takeaways

• Consumer sentiment has rebounded from a two-year low after positive news regarding upcoming dovish economic policy from the central bank and the end of the government shutdown.
• The University of Michigan Consumer Sentiment Index rose to 95.5 compared to 93.7 expected.
• Current conditions rose 1.2 points led mostly by future expectations which rose 6.3 points.

Consumer sentiment is still high historically, although below average for the period since the election of the US President Donald Trump. With talks underway to avoid another shutdown at home and negotiations taking place between Beijing and Washington to put an end to the ongoing trade war impacting multiple industries, sentiment may be on a more positive long-term course.

Rate hikes and price increases are expected to be tame in the near future with fewer respondents predicting an increase in borrowing costs compared to the previous survey. Inflation is estimated to drop to 2.3% in the next 5-10 years according to consumers, with interest rates predicted to match levels as low as those seen in 2017.

A measure in the survey showed consumers were the most optimistic on their finances since 2004 with 44% of consumers predicting improvement of their personal finances and only 8% predicting their situation becoming worse.

A measure of buying conditions for long-lasting goods rose and sentiment on current finances dipped to the lowest level seen in a year, both of which give a sense of consumers preparing for an economic slowdown.

while both expectations & current conditions indices within Univ Mich consumer sentiment bounced m/m in latest release,biggest improvement was in expectations (thank the stockmkt for that) while current conditions (historic correl w/ labor mkt) were a relative disappointment.

— econhedge (@econhedge) February 15, 2019

Expert Outlook

"The early February gains reflect the end of the partial government shutdown as well as a more fundamental shift in consumer expectations due to the Fed's pause in raising interest rates," said Richard Curtin, chief economist for the Surveys of Consumers.

"The lingering impact of the shutdown was responsible for some of the negative economic evaluations, and, at the time that these interviews were conducted, uncertainty about whether a second shutdown would occur continued to have a slight depressing impact on confidence."

Curtin added that the lower inflation expectations would make it more difficult for Fed officials to implement hawkish rate hike policy, as the central bank takes the University of Michigan survey into account when drafting policy.

This was confirmed recently by Cleveland Fed President Loretta Mester who stated earlier this week that consumer confidence was an important indicator which the central bank would be monitoring closely.

“We will need to keep a close eye on whether household sentiment weakens so much that people postpone spending or whether they remain cautiously optimistic,’’ she said.

"The assessment of current conditions was the second lowest since 2016, though the expectations read was significantly improved, back to levels seen in 2018. In the details, consistent with the bounce in sentiment, more respondents suggested that it was a good time to buy a major household item/vehicle/house," said Jon Jill, BMO Capital Markets' fixed income strategist.

Market Reaction

Gold is holding solid gains from earlier in today’s session following mixed economic data which shows decline in industrial production and a slight rebound in New York State manufacturing as well as the relatively positive consumer sentiment survey.

The survey gives useful insight not only into the current mindset of US consumers but into how that might impact central bank interest rate policy, arguably reinforcing the view of doves like St Louis Fed President James Bullard that rate hikes should be kept on hold for now.

Spot gold last traded up 0.758% at $1,314.52/oz with a high of $1,319.55/oz and a low of $1,310.66/oz, demonstrating support at the $1,310 mark.