The US dollar turned sharply lower on Friday night after a shocking release of US consumer sentiment. The University of Michigan’s regular survey showed consumer sentiment falling to 70.2 from 81.2 a month earlier, the lowest level since December 2011. This unpleasant data took the index by surprise, triggering a revaluation of assets and sentiment.
The index lost 13.5% over the month, the seventh-largest loss of confidence in the indicator’s history. On all occasions of this magnitude, reduction had occurred against a background of a sharp deterioration in the economy, with the last commensurate collapses in October 2008 and April 2020, when the economy posted the sharpest declines.
Due to the new wave of coronavirus, both components of current conditions (-7.8% to 77.9) and consumer expectations (-17.5% to 65.2) fell simultaneously.
The US markets reacted differently to the news. Demand for long-term bonds has increased in debt markets as smart money has raised doubts about the sustainability and speed of the economic recovery. This means that interest rates in the economy will remain low for longer.
After a brief fluctuation, the Nasdaq index increased as lower market yields sparked interest for growth stocks. This is nothing more than a reflex developed by the market, as lately, any downturn is seen as a reason to increase stimulus. But remember, it is not a hypothesis, and sometimes central banks or governments have their hands tied.
On Monday morning, market caution elevated to an even higher level following Chinese reports, highlighting a sharper economic slowdown. In July, industrial production growth slowed to 6.4% from 8.3% a month earlier and the expected 7.9%. Retail sales growth slowed to 8.5% from 12.1% a month earlier and was expected to be 10.9%.
US consumption and Chinese production are the two biggest drivers and indicators for financial markets. A sharp dip in these indicators would impact the markets, lasting for several days. At the same time, investors’ attention to other indicators will intensify.
We can expect a higher than usual market reaction to the publication of the Empire State manufacturing index and tomorrow’s retail sales data.
