US Consumer Confidence Drops to Record Low, Sparking Concerns of Impending Recession | Daily Market Analysis

Key events:

• Eurozone - EU Economic Forecasts
• Eurozone - Industrial Production (MoM) (Mar)
• USA - FOMC Member Bostic Speaks
• USA - FOMC Member Kashkari Speaks
• UK - BoE MPC Member Pill Speaks

Last week, the US stock markets closed on a mostly negative note. The Dow Jones Industrial Average dropped by 1.1%, while the S&P 500 declined by 0.3%. However, the Nasdaq managed to buck the trend by gaining 0.4%. The market was influenced by a combination of factors, including concerns over the debt ceiling deadlock and monetary policy.

The concerns over the debt ceiling impasse were further compounded on Friday by data that revealed a larger-than-anticipated decline in US consumer sentiment, leading to worries that this political stalemate could potentially spark a recession.

Last Friday, the University of Michigan Consumer Confidence index showed a significant drop, exceeding expectations. The level of confidence had already been quite low, and although some analysts were hoping for a rebound, it continued to plummet. This is concerning, as historically, such low levels of confidence have only been seen twice before: during the early 1980s crisis and the Global Financial Crisis.

These dire numbers suggest that a significant recession may be imminent for the US and that it could happen very soon.

In fact, recent data indicates that US Consumer Confidence has fallen twice as much as it did during the COVID-related lockdowns. This is a shocking development, as it means that consumer confidence is now worse than it was during the actual lockdown period.

The Federal Reserve is currently facing the challenge of stabilizing inflation at uncomfortably high levels. While there is still a possibility of a pause in their tightening measures, the likelihood of this happening is decreasing. Even if the Fed does pause at the next meeting, they will likely maintain a tightening bias. The economy is expected to continue slowing down, and the banking crisis is anticipated to worsen in the second half of the year. 

The Dollar Index (DXY) reached its highest level of the month at 102.7, up from 102.1, due to worsening market sentiment caused by the US debt ceiling stalemate and ongoing banking issues. While there may be some short-term strength for the US dollar if a debt resolution is reached, it is expected to continue to devalue in the long term.

Today, gold prices continued their downward trend from last week due to concerns about slower economic growth and high interest rates. As a result, investors have shifted their focus towards the US dollar, which is perceived as a safe haven.

Investors will be closely watching for any cues from several Federal Reserve speakers, including Chair Jerome Powell, who is scheduled to speak on Friday.

Gold prices had reached record highs in recent weeks, but have since declined as traders locked in profits and revised expectations for potential interest rate cuts by the Federal Reserve.

In the upcoming week, investors will be closely monitoring any new developments regarding negotiations to raise the debt ceiling. On Tuesday, the release of Retail Sales data will be a key focus, as a stronger reading could indicate that the economy is growing too rapidly, potentially prompting the Federal Reserve to implement further interest rate hikes.

On Tuesday, the Eurozone will release revised data on its first-quarter GDP, with economists expecting a meager 0.1% expansion during the three months to March. However, some economists believe that stagnation may continue, leading to a possible recession later in the year. The ZEW Institute's surveys of business conditions and sentiment in Germany, the largest economy in the region, will also be released on the same day. In the UK, the wage component data in the jobs report will be closely monitored as inflation remains high. The Bank of England has indicated that its decision on whether to hike rates in June will depend on the wage and inflation data that will be released before then.