Michigan consumer sentiment and the US dollar
On the second Friday of most months, at around 10:00 AM Eastern time, a number reaches the market that you will not find in any government report: the preliminary reading of US consumer sentiment from the University of Michigan. The index is built from a survey of ordinary households and shows how people feel about their own finances and the wider economy. The headline rarely causes a storm, but the inflation-expectations questions buried inside it can move the dollar, because those are exactly the figures the Federal Reserve watches so closely.
What the Michigan consumer sentiment index actually is
The Index of Consumer Sentiment is produced as part of the Surveys of Consumers run by the University of Michigan. It is a monthly survey of US households, conducted by telephone and online, in which respondents answer questions about their own financial situation, whether it is a good time to make larger purchases, and their expectations for the economy over the coming months and years. From those answers one composite index is calculated, alongside two components: an assessment of current conditions and expectations for the future.
The logic behind watching this survey is straightforward. A consumer who feels secure in their job and income spends more, and household spending is the single largest pillar of the US economy. A frightened consumer starts to save, postpones bigger purchases and cools demand. Sentiment is therefore not a soft curiosity but an early signal of where consumption, and behind it the whole business cycle, is heading. That is why the Michigan survey sits in the calendar alongside hard data on prices and employment.
Preliminary and final readings — twice a month
What sets this survey apart from most macro releases is its double premiere. The University of Michigan publishes the data twice a month. First, around mid-month, comes the preliminary reading, based on part of the collected surveys. Near month-end the final reading is published, which incorporates the full sample and can revise the preliminary figure up or down. Both releases usually fall at 10:00 AM Eastern time, with a shift of about an hour when the two sides of the Atlantic move their clocks to daylight saving time on different dates.
For the market the preliminary reading often matters more, because it reaches investors first and prices in the fresh information. The final reading acts as confirmation: if it agrees with the preliminary one the reaction is muted, while if it clearly revises the figure it can trigger a second, smaller move. That distinction is worth holding in mind before you even think about a position around this release. Planning the day around such premieres is easier once you have learned to read the economic calendar and tell first-tier data from second-tier.
Inflation expectations — the part that matters most for the dollar
The most market-relevant part of this survey is not the headline sentiment itself but the questions about expected inflation. The University of Michigan asks respondents how they think prices will change over a one-year horizon and over the long run, described as five to ten years. Those two figures are the inflation expectations of households, which is something quite different from current inflation as measured by the CPI.
Why does this matter so much? The central bank believes inflation is to a large degree self-fulfilling through expectations. If people expect prices to rise quickly, they begin to demand higher wages and accept higher prices today, which makes that inflation real. That is why the Federal Reserve keeps repeating that its job is to keep inflation expectations anchored, meaning stable and close to target. The long-run measure from Michigan is one of the barometers of that anchoring watched by policymakers. A jump in long-run expectations usually works in the dollar's favour, because it pressures the central bank to stay hawkish and not rush into rate cuts. How inflation itself feeds into prices I lay out separately in the piece on the CPI print and its effect on the dollar.
„Inflation depends on expectations to a significant degree. If expectations are anchored, that gives the central bank more freedom to support employment." — Jerome H. Powell, FOMC press conference, 4 May 2022, Federal Reserve transcript.
Current conditions versus expectations
Beneath a single headline sit two components worth reading separately. The current conditions component shows how respondents rate their finances here and now and whether they think it is a good moment for bigger purchases. The expectations component asks about the future: anticipated income, the state of the economy in a year and over a longer horizon. The first describes the present, the second is forward-looking, and it is usually the one that lights up first when a consumer begins to sense a change in the cycle.
For a market observer that difference is often more valuable than the composite figure itself. There are months when current conditions hold firm while expectations clearly weaken. That is a signal that households are still coping today but starting to worry about tomorrow, which often precedes a real cooling in spending. Reading only the headline without this breakdown means losing half the information the survey carries. Sentiment is also closely tied to a harder measure of how much Americans actually spend in shops, namely retail sales data.
Michigan versus the Conference Board — when two surveys diverge
The University of Michigan is not the only source of sentiment data. The other well-known measure is the consumer confidence index published by the Conference Board, a research organisation that runs its own, larger survey. Both try to capture the same phenomenon but differ in method, choice of questions and emphasis. The Michigan survey puts more weight on personal finances and inflation expectations, while the Conference Board survey is more sensitive to conditions in the labour market.
For that reason the two measures can sometimes diverge, painting a conflicting picture of the same month. For an observer that divergence is not an error but information: it usually means households assess inflation differently from the way they assess job prospects. For the currency market, however, the Michigan survey has an edge in one specific point, namely those inflation expectations, because they land directly on the desk of the Federal Reserve. How sentiment surveys sit within the broader toolkit of macro releases is something I cover in more depth in the fundamental analysis section on ForexMechanics.
Common misunderstandings
The first misunderstanding is confusing sentiment with current inflation. The sentiment index says how people feel, while inflation expectations say what they anticipate for prices. Neither figure is a measurement of inflation that has actually occurred. The second is treating the composite headline as the whole story, when most of the substance lies in the split between current conditions and expectations, and for the dollar in the inflation expectations alone.
The third misunderstanding concerns the market reaction. Many beginners assume that better sentiment always means a stronger dollar. In practice the reaction depends on which part surprised and how the market was positioned beforehand. Higher inflation expectations can strengthen the dollar even with a weaker headline, because what matters most to the central bank is the inflation anchor. The fourth mistake is reacting only to the preliminary reading and ignoring the final one, which sometimes changes the message of the release.
Your next step
- Find both Michigan release dates in the calendar. Set the filter to the United States and locate the two entries each month: the preliminary reading around mid-month and the final near month-end. Note the time of around 10:00 AM Eastern at each, and check whether a CPI print or a jobs report falls in the same week, because those will dominate the dollar's reaction.
- Keep a journal of the last three readings. For each release record four numbers: the headline sentiment, the expectations component, the one-year inflation expectations and the long-run five-to-ten-year expectations. Add the EUR/USD reaction after one hour. Within three months you will see in your own data that it is inflation expectations, not the headline, that most often moves the rate.
- Pair sentiment with hard consumption data. Alongside the Michigan survey, add retail sales to your watchlist and compare whether stated sentiment matches real spending. When the two diverge over several months, you have an early signal of a turn in the cycle.
Sources & bibliography
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University of Michigan Surveys of Consumers — data tables (Index of Consumer Sentiment and inflation expectations) · oficjalne tabele danych: zbiorczy indeks, składniki bieżący i oczekiwań oraz miary oczekiwań inflacyjnych www.sca.isr.umich.edu ↗
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Federal Reserve Monetary Policy — rola zakotwiczonych oczekiwań inflacyjnych · znaczenie oczekiwań inflacyjnych dla celu inflacyjnego i decyzji o stopach www.federalreserve.gov ↗
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The Conference Board Consumer Confidence Index — methodology · druga główna ankieta nastrojów konsumentów USA, do porównania z badaniem z Michigan www.conference-board.org ↗
Frequently asked
How do Michigan inflation expectations differ from the CPI inflation reading itself?
These are two entirely different things, even though both concern prices. The CPI measures inflation that has already happened, that is, how much the prices of a basket of goods actually rose in the past month. The inflation expectations from the University of Michigan survey, by contrast, say what households anticipate for prices in the future, over a one-year and a five-to-ten-year horizon. That is a measure of attitude, not of fact. For the Federal Reserve both figures matter, but for different reasons. The CPI shows the present state, while expectations indicate whether inflation risks becoming entrenched through the behaviour of people who start demanding higher wages and accepting higher prices today. That is why the central bank works so hard to keep long-run expectations anchored close to target, even when current inflation temporarily strays from two percent.
When and how often is the Michigan consumer sentiment released?
The University of Michigan survey is published twice a month, which sets it apart from most macro data released once a month. First, around the middle of the month, comes the preliminary reading based on part of the collected surveys. Near month-end the final reading is published, which incorporates the full sample and can revise the preliminary figure. Both releases usually fall at 10:00 AM Eastern time, which corresponds to roughly 16:00 in Poland. The gap can shift by about an hour in periods when the United States and Europe switch to daylight saving time on different dates, so it is worth checking the exact time in an economic calendar. The preliminary reading usually matters more to the market because it arrives first, while the final one serves as confirmation or correction.
How does the Michigan survey differ from the Conference Board index?
These are the two main measures of US consumer sentiment, and both try to capture the same phenomenon, but they differ in method and emphasis. The University of Michigan survey puts more weight on personal finances and inflation expectations, which gives it an edge for the currency market in one specific point, namely those expectations that land on the desk of the Federal Reserve. The Conference Board survey, in turn, is larger and more sensitive to conditions in the labour market. For that reason the two measures can sometimes diverge, painting a conflicting picture of the same month. For an observer that divergence is not an error but information: it usually means households assess inflation differently from job prospects. It is worth following both, but for the dollar's reaction the Michigan inflation expectations are usually the more important.
Why can a jump in inflation expectations strengthen the dollar?
The mechanism runs through the policy of the Federal Reserve. The central bank holds that anchored inflation expectations are a condition for lasting price stability, because when people expect prices to rise quickly they fuel that rise themselves through wage demands and purchasing decisions. So if the long-run expectations from the University of Michigan survey suddenly climb, the market reads it as a signal that the central bank will have to stay hawkish, that is, keep higher interest rates for longer to stamp out the risk of inflation becoming entrenched. Higher rates usually make the dollar more attractive to capital seeking yield, which is why a jump in expectations works in the US currency's favour. This is a rule of thumb, not an iron law, because the reaction also depends on how the market was positioned beforehand and on what bond yields and other data are doing at the time.