Last week, the US UoM inflation expectations jumped, which might be a sign of high US CPI inflation which will be released on Wednesday. There was a rout in the bond market, however, markets might have gotten ahead of themselves, since these are just expectations.

UoM Inflation Expectations Higher Consumer Sentiment Lower

The May consumer sentiment survey from the University of Michigan provided mixed signals, with a notable decline in the primary sentiment reading, suggesting a dovish trend. However, the bond market focused on the rising inflation predictions, which raised concerns among investors. The 1-year inflation rate increased to 3.5% from 3.1%, reaching its highest level since November, while the 5- to 10-year metric also increased to 3.1% from 3.0%.

These inflation forecasts are particularly concerning for the market, especially with the upcoming Consumer Price Index (CPI) report expected to dominate next week’s trading. US 2-year rates have risen, with similar increases observed across the yield curve. The intensification of the yield increases began after the release of the consumer sentiment data, raising questions about whether the market may be overlooking some crucial factors. I think that the market may be misinterpreting the significance of the UoM survey results. This time the survey was conducted online rather than by phone, and respondents in Michigan have consistently reported slightly higher inflation estimates. So this discrepancy is not significant enough to warrant the market’s reaction.

Overall, the mixed signals from the consumer sentiment survey and the focus on rising inflation predictions led to uncertainty in the market, especially with the US CPI inflation coming on Wednesday, with analysts offering differing interpretations of the data. We will surely monitor the upcoming economic reports, particularly the CPI report, for further insights into inflationary pressures and their potential impact on market dynamics. But just in case we get a strong number, markets are already prepared to some degree.