US consumer bounces back – MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that the drop in the 2-year UST bond yield also reflected disappointment after a weaker than expected consumer confidence report.

Key Quotes

“The index hit a 6-month low with the expectations component falling to the lowest level since February 2014. Certainly if the downward momentum was sustained it would signal a slowdown in consumption. Given the improvement in financial market conditions and US equities it is difficult to explain the move lower. Gasoline prices are moving higher however, with the average retail price up 36% from the low in February and this may be playing a notable role in the pullback in confidence.

But the drop in confidence came on the same day that consumer spending data for April revealed a surge in spending at the start of Q2. Real consumer spending jumped 0.6% in April from March, setting the economy up for a notable rebound in real GDP from the subdued 0.8% pace of annualised growth recorded in Q1. This is crucial as the FOMC were looking for evidence to confirm Q1 growth was an aberration and the consumer spending data for April confirms that.

The jobs data on Friday is really now the only domestic economic hurdle to raising rates in June. However, the increased anxiety over ‘Brexit’ could certainly escalate from here and that uncertainty could well prove enough to delay until July.  The continued uncertainty will likely contain dollar buying for now.”