Talking Points:

- U. of Michigan Sentiment survey took a dip below 100 to 97.8 in November, misses estimated 100.9

- Short-term inflation expectations was up 10 basis points over last month; long-term inflation remains stagnant

- Consumers worry that income gains will not outweigh rate hike pace

- Weak sentiment puts pressure on the dollar hitting fresh weekly low at 94.26

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Survey Data

The preliminary University of Michigan Consumer Sentiment survey came in lower than expected in early November. The decline is primarily attributed to declines in current and expected economic conditions. However, despite the drop in the Index to 97.6, this morning’s print marks the second highest level since January. University of Michigan stated that over the Sentiment Index “has remained trendless since the start of the year, varying by less that 4.0 Index-points around its 2017 average of 96.8.” As previously mentioned current conditions came in at 113.6 versus the expected 116.3, current expected economic conditions were at 87.6 compared to 91 expected.

Economic Drivers

U. of Michigan sited that key concerns for consumers and policy makers alike are, “prospective trends in jobs, wages, inflation, and interest rates.” A record number of consumers mentioned an improving labor market in their responses. Also, anticipated wage gains which were at the highest two-month level in a decade. Consumers’ optimism on the labor market was offset by a slight rise in inflation expectations and a consensus that interest rates will continue to increase in the next year.

Notably, U. of Michigan further stated, “While the expected Fed rate hikes seem to be the right preemptive action, the critical issue is whether income gains will be sufficient to outweigh rate hikes in home and vehicle purchase decisions.” These comments reflect that consumers are beginning to realize that inflation can pose a threat to disposable income so long as wages remain stagnant.

Next Rate Hike

Market consensus is that the next rate hike will be at the December FOMC meeting. According to the Fed Funds Futures rate, a hike is fully priced in for next month.

Below is a list of economic releases that has driven the US Dollar lower:

- USD U. of Mich. Sentiment (NOV P): 97.8 versus 100.9 expected, from 100.7 previous

- USD U. of Mich. Current Conditions (Nov P): 133.6 versus 116.3 expected, from 116.5 previous

- USD U. of Mich. Expectations (SEP P): 87.6 versus 91 expected, from 87.7 previous

Chart 1: US Dollar Index 1-hour Chart (November 5 - 10, 2017)

U. of Michigan: Will Income Gains Be Sufficient to Outweigh Rate Hikes?

As we head into the weekend, the US Dollar Index came under pressure following the bearish sentiment. The US Dollar fell to a fresh weekly low at 94.26.

--- Written by Dylan Jusino, DailyFX Research