Two recent surveys indicate that U.S. consumer confidence has
shown a notable decline amid talks about inflation and potential
tariff. Our Head of Corporate Credit Research Andrew Sheets
discusses the market implications.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Andrew Sheets, head of
Corporate Credit Research at Morgan Stanley. Today I’m going to
talk about the consumer side of the confidence debate.
It’s Thursday, February 27th at 2pm in London.
Two weeks ago on this program I discussed signs that uncertainty
in U.S. government policy might be hitting corporate confidence,
as evidenced by an unusually slow start to the year for
dealmaking. That development is a mixed bag. Less confidence and
more conservatism in companies holds back investment and reduces
the odds of the type of animal spirits that can drive large
gains. But it can be a good thing for lenders, who generally
prefer companies to be more cautious and more risk-averse.
But this question of confidence is also relevant for consumers.
And today, I want to discuss what some of the early surveys
suggest and how it can impact our view.
To start with something that may sound obvious but is nonetheless
important, Confidence is an extremely powerful psychological
force in the economy and financial markets. If you feel good
enough about the future, you’ll buy a stock or a car with little
regard to the price or how the economy might feel at the moment.
And if you’re worried, you won’t buy those same things, even if
your current conditions are still ok, or if the prices are even
cheaper. Confidence, you could say, can trump almost everything
else.
And so this might help explain the market’s intense focus on two
key surveys over the last week that suggested that US consumer
confidence has been deteriorating sharply.
First, a monthly survey by the University of Michigan showed a
drop in consumer confidence and a rise in expected inflation. And
then a few days later, on Tuesday, a similar survey from the
Conference Board showed a similar pattern, with consumers
significantly more worried about the future, even if they felt
the current conditions hadn't much changed.
While different factors could be at play, there is at least
circumstantial evidence that the flurry of recent U.S. policy
actions may be playing a role. This drop in confidence, for
example, was new, and has only really showed up in the last month
or two. And the University of Michigan survey actually asks its
respondents how news of Government Economic policy is impacting
their level of confidence. And that response, over the last
month, showed a precipitous decline.
These confidence surveys are often called ‘soft’ data, as opposed
to the hard economic numbers like the actual sales of cars or
heavy equipment. But the reason they matter, and the reason
investors listened to them this week, is that they potentially do
something that other data cannot. One of the biggest challenges
that investors face when looking at economic data is that
financial markets often anticipate, and move ahead of turns in
the underlying hard economic numbers. And so if expectations are
predictive of the future, they may provide that important, more
leading signal.
One weak set of consumer confidence isn’t enough to change the
overall picture, but it certainly has our attention. Our U.S.
economists generally agree with these respondents in expecting
somewhat slower growth and stickier inflation over the next 18
months; and Morgan Stanley continues to forecast lower bond
yields across the U.S. and Europe on the expectation that
uncertainties around growth will persist.
For credit investors, less confidence remains a double-edged
sword, and credit markets have been somewhat more stable than
other assets. But we would view further deterioration in
confidence as a negative – given the implications for growth,
even if it meant a somewhat easier policy path.
Thanks for listening. If you enjoy the show, leave us a review
wherever you listen and share Thoughts on the Market with a
friend or colleague today.
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