June consumer sentiment improves on easing Iran fears but elevated inflation, a hawkish Fed, and tech pressure kept markets in the red.
Consumer sentiment continued to recover from depressed levels in June, and on a more encouraging note, consumers grew more optimistic about the future as gasoline prices eased, according to the University of Michigan's final consumer sentiment survey released Friday.
The consumer sentiment index for June was revised up to 49.5 from the preliminary reading of 48.9. The index also improved from May's 44.8 reading. Despite the month-over-month increase, overall sentiment remained nearly 19% below year-ago levels.
University of Michigan Surveys Director Joanne Hsu noted that sentiment improved across income groups, wealth levels, and political affiliations.
Future Outlook Turns More Optimistic
The improvement was largely driven by expectations. The current conditions index came in at 47.7, revised slightly lower from the mid-month reading of 48.4, though it remained above May's 45.8 level.
Meanwhile, the expectations index, which measures consumers' outlook for the next six months, climbed to 50.7 from 44.1 in May. The reading exceeded both the preliminary estimate of 49.3 and the key 50 threshold often associated with stabilizing confidence, potentially signaling a turning point in consumer sentiment. Even so, expectations remained roughly 13% below levels seen a year ago.
Hsu attributed the improvement in expectations to easing concerns about the potential economic consequences of the Iran conflict.
That said, consumers remained uneasy about the cost of living, with more than half of respondents spontaneously mentioning that high prices continued to strain their personal finances.
Inflation Expectations Moderate but Remain Elevated
Inflation expectations eased modestly but remained elevated. One-year-ahead inflation expectations declined to 4.6% from 4.8% in May. However, the measure remained well above the 3.4% level recorded in February before the conflict began.
Inflation Expectations Slip Yet Elevated
Source: UMich
Long-term inflation expectations, measured over a five-year horizon, fell to 3.3% from 3.9%, though they remained somewhat above the 2.8%-3.2% range that prevailed throughout 2024.
Fed Likely to Maintain Hawkish Bias
Recent data showed Inflation, as measured by the personal consumption expenditures (PCE) price index, rising at an annual rate of 4.1% in May, while core PCE inflation came in at 3.4%, both well above the Federal Reserve's 2% target.
With one-year inflation expectations still running considerably above the Fed's goal, policymakers have little room to abandon their hawkish stance. Following the June 16-17 Federal Open Market Committee (FOMC) meeting, the central bank removed its easing bias from the post-meeting statement and raised its median PCE inflation forecast for 2026.
More notably, the updated dot plot turned more hawkish, with at least nine of the 18 policymakers signaling a preference for another rate hike this year.
New Fed Chair Kevin Warsh declined to submit a dot projection but struck a similarly hawkish tone during the post-meeting press conference.
Markets Shrug Off Improving Sentiment Data
How markets ultimately respond to the stronger sentiment reading remains uncertain, particularly as investors increasingly focus on artificial intelligence-driven cost pressures.
On Thursday, despite stellar earnings from AI memory-chip maker Micron (MU), which pushed its shares to a fresh record high, the tech-heavy E-mini Nasdaq 100 futures (NQ) and E-mini S&P 500 futures (ES) weakened. The pullback came after Apple announced price increases across several major product lines, excluding iPhones, citing higher component and memory costs.
Following the consumer sentiment release, major equity futures initially trimmed losses and briefly moved above unchanged levels. However, the gains quickly faded, with the major averages turning lower shortly afterward.