Consumers Fear Higher Inflation

Yields rise following inflation expectations print. Treasury yields were little changed to start the day, but rose after University of Michigan inflation expectations figures were well above forecasts, with the long-term figure rising the most since 1993. Yields closed 4-6 bps higher across the curve, pushing the 2-year yield back above 4%, while the 10-year yield ended at ~4.32%. The move also occurred alongside spiking rates in Germany following an announcement that government leaders approved a newly proposed 500-billion-euro stimulus fund. Meanwhile, US equities surged alongside the Treasury sell-off, with the NASDAQ up 2.61% while the S&P 500 rose 2.13%.

Consumer sentiment falls to multi-year lows. Preliminary data released today by the University of Michigan showed that consumer outlooks likely deteriorated by more than expected in March as economic headwinds mount. The overall consumer sentiment index reading landed at 57.9 vs. 64.7 in February and far below expectations of a slight decline to 63. The report noted that policy uncertainty was key to the sharp decline, likely an indirect reference to tariffs, as it makes it more difficult for consumers to plan for the future. Inflation expectations also surged, with consumers now expecting prices to grow by 4.9% over the next year vs. expectations of no-change from last month’s 4.3%. Commenting on the elevated inflation outlook, survey director Joanne Hsu said, “Critically, these consumers generally expect tariffs to generate substantial upward pressure for inflation in the future…”

The Fed is expected to hold rates steady next week. Rising uncertainty amid tariffs, trade wars, and fears of a prolonged economic slowdown are not expected to impact the Fed’s upcoming policy meeting. Fed Funds futures have odds of a 25 bp rate cut priced in at nearly 0%, and a move is not expected until June. The Fed has remained insistent that economic strength will allow them to continue with their cautious approach; Chair Powell argued last week that the Fed is “well positioned,” though he acknowledged that trade policy could soon play a larger role. To that end, futures are currently ~50/50 between two or three rate cuts in 2025, a shift from debates about one versus two cuts earlier this year.