The week ahead will carry additional color into the attitudes of U.S. consumers, with the University of Michigan set to unveil a preliminary gauge of sentiment from its November surveys.

Domestic consumption appears to have helped the U.S. maintain healthy economic growth, with Federal Bank Reserve chair Jerome Powell having extolled consumer confidence and spending gains as “solid”.

(Click on image to enlarge)

In his press conference Wednesday, following the Federal Open Market Committee’s (FOMC) rate cut announcement, Powell said that the country has had an economy “where the consumer is really driving growth,” amid personal consumption expenditures (PCE) that were nearly 3% this quarter in the first reading.

He added that “overall, we see the economy as having been resilient” to the headwinds that “have been blowing this year.”

Indeed, a recent easing of certain concerns, including a partial, so-called ‘Phase One’ agreement to U.S.-China trade talks, as well as a diminished likelihood of a ‘no-deal’ departure by the UK from the EU, has somewhat allayed investors’ nerves and spurred lower prices of domestic government bonds.

However, uncertainties over a longer-term resolution to U.S.-China trade tensions resurfaced Thursday after Chinese officials raised doubts about an ultimate deal.

(Click on image to enlarge)

The yield on the U.S. 10-year Treasury note has swung wildly over the course of events, falling roughly 15bps since the FOMC’s rate cut – to its latest bid of around 1.69% intraday Thursday.

Cutting Deeper

The FOMC elected Wednesday to slash the target range for the federal funds rate by another 25bps – its third cut in 2019 – to 1.50%-1.75%, on the back of “weak” business fixed investment and a rate of inflation that has been running below its 2% target.

Fed Chair Powell said that the committee views “the current stance of policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent” with its outlook.

Overall, he said, “we’ve seen moderate growth, a strong labor market,” and inflation “moving up,” and the outlook is “for more of the same”.

(Click on image to enlarge)

With the central bank apparently returning to a stricter data dependency approach to monetary policy, future implied probabilities of additional interest rate cuts by the FOMC resided at relatively low levels following the meeting.

Analysts at Janney Montgomery noted that if the Fed wanted an opening to pause in its current cutting process, sentiment Wednesday was “about as good” as the central bank was going to get.

Janney observed that on the day prior to both the FOMC’s July and September meetings, there had been more than a 50% chance of a cut priced in at the next meeting; as of Wednesday’s close, “we had a mere 20% chance of a December cut.”

At last glance, the future implied probabilities of a 25bp December rate cut stood at around 30%, while meetings in January and March 2020 were each around 44%.

Consumer Reports

Against this backdrop, consumers have been largely unfazed by the prevailing geopolitical strife across the globe, including a still unresolved Brexit, ongoing U.S.-China trade tensions, along with protests and political unrest in Hong Kong, and an impeachment battle against U.S. President Donald Trump.

The Confidence Board highlighted in its October Consumer Confidence Index (CCI) that levels remain high and shoppers are unlikely to curtail their holiday spending.

The latest CCI reading edged down only slightly, following a decline in September. The Index now stands at 125.9, down from 126.3 in the prior month.

The Present Situation Index – based on consumers’ assessment of current business and labor market conditions – rose from 170.6 to 172.3, while the Expectations Index – based on consumers’ short-term outlook for income, business and labor market conditions – fell from 96.8 in September to 94.9 in October.

The domestic landscape also seems to support shoppers’ attitudes, amid higher real disposable personal income and the overall pace of economic growth.

(Click on image to enlarge)

According to the “advance” estimate released Bureau of Economic Analysis (BEA), real gross domestic product (GDP) rose at an annual rate of 1.9% in the third quarter of 2019 compared to an increase of 2.0% in Q2’19.

The BEA attributed the rise in real GDP in the latest quarter in large part to positive contributions from PCE, federal government spending, residential fixed investment, state and local government spending, and exports. These were partly offset by lower non-residential fixed investment and private inventory investment.

Excluding food and energy prices, the PCE price index rose 2.2%, compared with an increase of 1.9% in Q2. Also, over the same period, real disposable personal income climbed 2.9%, compared with an increase of 2.4%, and personal savings were US$1.34trn, up from US$$1.32trn.

Moreover, some market participants continue to praise consumer spending habits, despite a recent downturn in retail sales growth.

Jefferies chief financial economist Ward McCarthy noted that he expects the consumer sector will continue to be “a source of solid growth,” while softness in September’s retail figures will “prove to be the pause in spending that refreshes the strong trend.”

Advance estimates of U.S. retail and food services sales for September 2019 fell 0.3% from the prior month to US$525.6bn but rose 4.1% year-on-year.

Consumer Anxieties

While the strength of the U.S. retail sector has generally remained resilient to recent global headwinds, as well as headline shocks about bankruptcies and restructurings, certain of the U.S.-imposed duties on Chinese imports may now be posing more adverse impacts on domestic retailers, which, in turn, could affect consumer confidence, household spending and, ultimately, overall economic growth.

(Click on image to enlarge)

Market participants have warned that certain levies could impinge on profitability at several major U.S. firms, including sportswear producer Nike (NYSE: NKE), iconic department stores Macy’s (NYSE: M), Kohl’s (NYSE: KSS) and Walmart (NYSE: WMT), as well as electronics giant Best Buy (NYSE: BBY).

Meanwhile, recent Chapter 11 filings of iconic stores such as Forever 21, Barney’s, Gymboree, Diesel and Payless ShoeSource have spurred jitters about the overall health of the U.S. economy – especially since consumer spending accounts for more than two-thirds of GDP.

However, these consumer anxieties have yet to pose a general threat to the otherwise “solid” gains in consumer spending and consumer confidence highlighted by Fed chair Powell in his latest press conference.

In fact, the University of Michigan noted that its October Surveys of Consumers showed that “the overall level of consumer confidence has remained quite favorable”.

(Click on image to enlarge)

Richard Curtin, University of Michigan’s chief economist, said that the focus of consumers has been “on income and job growth, while largely ignoring other news.

“The most spontaneous references were to the negative impact of tariffs, which fell to 27% in October from last month’s 36%; the impeachment inquiry totaled just 2% in October, less than the 5% who mentioned a negative impact from the GM strike.”

Curtin warned that “the multiple sources of uncertainty will keep consumers focused on potential threats to their prevailing optimism, with the most critical being threats that could significantly diminish their job and income prospects.”

Market participants will likely be keeping a watchful eye for the University of Michigan’s release of its preliminary data for November on Friday, November 8, at 10:00 am ET.

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of the U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.