The University of Michigan said this morning that consumer sentiment fell to 46.3 — a five-month low. Current conditions crashed from 50.9 to 44.7, the biggest miss in months. And one-year inflation expectations climbed to 4.7%, up from 4.6% in September. The consumer feels worse and expects higher prices. The S&P 500 gained 0.6%. Make that make sense.
The Close
Strong close to a volatile week. The S&P 500 gained 0.6% to 7,811. The Dow rose 0.8% to 51,655. The Nasdaq climbed 0.6%. The Russell 2000 added 0.4% to 2,805.
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| S&P 500 | 7,811 | +0.6% | ||
| 10-Yr Yield | 5.27% | +2 bps | ||
| Dow Jones | 51,655 | +0.8% | ||
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| Real Estate | +1.2% | |||
| Consumer Disc | +0.9% | |||
| Energy | +0.8% | |||
| Health Care | +0.6% | |||
| Financials | +0.6% | |||
| Materials | +0.4% | |||
| Industrials | +0.4% | |||
| Technology | +0.4% | |||
| Utilities | +0.2% | |||
| Consumer Staples | −0.2% | |||
| Comm Services | −0.7% | |||
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Nine of eleven sectors closed higher. Real estate led at 1.2% as yields pulled back from Thursday's highs. Consumer discretionary gained 0.9%, with Tesla up 3.2% and Amazon adding 2.6%. Energy rose 0.7%. Health care bounced 0.6% after getting hammered all week. Technology gained just 0.4% — still licking its wounds after Thursday's chip selloff.
The telecom stocks got crushed. T-Mobile fell 13.3%. AT&T dropped 9.8%. Verizon lost 8.8%. Three of the biggest names in wireless, all down between 9% and 13% in one session. The selloff dragged communication services down 0.7%, the worst sector of the day.
On the winning side, Fastly surged 15.9%. Novavax jumped 15.8%. Crown Castle gained 15.6% as falling yields lifted the REIT. Moderna rose 14.2%. Humana added 11.6%.
What The Market Is Pricing In
The Michigan number this morning was bad across the board. Headline sentiment fell to 46.3. Current conditions — how people feel about the economy right now — collapsed from 50.9 to 44.7. That's the biggest miss in months.
But it's the inflation expectations number that matters most. When the survey asks people what they think prices will do over the next year, the answer ticked up to 4.7%, from 4.6% last month. The five-year number rose to 3.5%, from 3.4%. Both are moving the wrong direction.
Here's why that matters more than the sentiment headline. The Fed has said — over and over — that it watches inflation expectations closely. When consumers expect prices to keep climbing, they change how they spend, how they negotiate raises, and how they set prices in their own businesses. The expectation becomes the reality. On Wall Street they call it an unanchoring of expectations — and it's one of the things that keeps Fed officials up at night.
One-year inflation expectations just hit 4.7% — above the 4.5% level that has historically put the Fed on high alert. The consumer feels worse. The consumer expects higher prices. And the market rallied because it read the sentiment collapse as "the Fed won't hike." But the Fed isn't watching how people feel. The Fed is watching what people expect prices to do. And that number just moved higher for the third straight month.
The market celebrated today because it thinks a weak consumer means the Fed pauses. But the PepsiCo earnings yesterday told you the consumer is still spending — revenue was up 5.6%. The consumer isn't weak. The consumer is pessimistic about the future while still buying things today. That combination — spending now while expecting the worst — is the textbook definition of how inflation becomes embedded. People buy now because they think it'll cost more later.
I saw this exact psychology in 1979 and 1980. Consumers hated the economy. Sentiment was in the gutter. But spending held up because people were front-loading purchases before prices went higher. The Fed had to keep tightening even though the consumer felt terrible, because the inflation expectations were the problem, not the sentiment score.
What's Next
Three things I'm watching next week:
01 — Iran and oil over the weekend
Oil spiked 5% Thursday on Pentagon strike reports. Brent is near $105. Any escalation over the weekend sends oil higher Monday morning, and every dollar on oil feeds straight into the inflation expectations number that just hit 4.7%. This is the variable the market can't model and the one that could rewrite the whole story by Monday's open.
02 — JPMorgan and Goldman Sachs earnings — Tuesday, October 13
The two biggest banks in the country report before the open. This is the first read on how the real economy is absorbing 5.35% on the 10-year. Are companies still borrowing? Are consumers still paying their credit cards? Are loan losses ticking up? The answers will tell you whether the cost squeeze from PepsiCo is an isolated story or the start of something broader.
03 — September CPI — Wednesday, October 14 at 8:30 a.m. ET
After Michigan's one-year inflation expectations hit 4.7%, Wednesday's CPI release is the most important data point of the month. The core number — prices excluding food and energy — is what the Fed watches. Anything above 0.3% month over month would confirm that the ISM prices-paid spike, the PepsiCo margin squeeze, and today's rising expectations are all part of the same story. Below 0.2% and the market gets the breather it's pricing in.
The consumer feels terrible and expects higher prices. The market thinks that's bullish. Next week's CPI will settle who's right.
That's it for today. Have a good weekend. I'll be back on Monday after the close.
