The University of Michigan’s final consumer sentiment report for August stands at 58.2, slightly below the preliminary estimate of 58.6. August’s consumer sentiment declined from the prior level of 61.7, with current conditions marked at 61.7 compared to the preliminary 60.9.
Inflation expectations for the next year are 4.8%, revised down from the preliminary 4.9%. The five-year inflation expectation has been adjusted to 3.5% from the earlier 3.9%. Although these expectations remain higher than last month, they have been revised downward.
Impact on Economic Outlook
Feedback on numerous economic aspects dipped, with durable goods purchasing conditions dropping to their lowest in a year. August saw a contraction in outlooks for business conditions and labour markets, yet expectations for personal finances remained stable, albeit at lower levels compared to the previous year.
The final August sentiment reading confirms a cooling in the US consumer, with the headline number revised slightly lower to 58.2. The drop in expectations for business and labor conditions suggests households are growing more cautious about the future. We should therefore consider protective strategies, such as buying put options on consumer discretionary ETFs like the XLY, which are sensitive to spending pullbacks.
This consumer weakness is supported by other recent data, as we saw in the July retail sales report released two weeks ago, which showed a surprising 0.4% decline against expectations of a modest gain. Major retailers like Target and Lowe’s also offered cautious forward guidance during their earnings calls earlier this month, citing slowing foot traffic. This real-world evidence gives more weight to the idea of a weakening consumer, making bearish plays more compelling.
Fed Policy and Market Strategy
However, the downward revision in five-year inflation expectations to 3.5% is a critical piece of information. This suggests consumers believe long-term inflation is becoming more anchored, which supports the Federal Reserve’s recent narrative that policy is sufficiently restrictive. This follows the latest Core PCE reading for July which held steady at 3.2%, showing that progress on inflation, while slow, has not reversed.
This easing inflation pressure reduces the odds of another Fed rate hike, with fed funds futures markets now pricing in only a 15% chance of a hike at the September meeting. A less aggressive Fed is typically bullish for interest-rate-sensitive assets. We could see this as an opportunity to buy call options on bond ETFs like TLT, anticipating that yields may have peaked for this cycle.
We saw a similar dynamic play out back in late 2023, when weakening economic data began to emerge alongside falling inflation prints. That period led to significant market volatility before the Federal Reserve eventually signaled a pivot in its policy stance. Given this historical context, buying straddles or strangles on the SPX could be an effective way to trade the increased uncertainty we expect in the coming weeks.
