US consumer confidence, as measured by the Conference Board, edged down to 93.1 in May from an upwardly revised 93.8 in April; this compared with TD’s 90.5 forecast and a consensus estimate of 92.0. The gauge has recently diverged from other sentiment measures including UMich and Morning Consult, while ongoing conflict involving Iran and elevated petrol prices are flagged as potential drags on the index.
Within the survey, the labour differential fell to 6.9, aligning with softer job-finding expectations reported in the NY Fed survey. Buying plans weakened and inflation expectations stayed high. Write-in responses skewed more negative, with more frequent references to prices, oil and gas for a second month running, and mentions of war, geopolitics and conflict remaining elevated, pointing to concerns about inflation effects linked to the Middle East.
Rising Risks for Consumers and Market Volatility
We see that consumer confidence numbers are holding up better than expected for now, but the details within the report paint a much weaker picture for the weeks ahead. This divergence between headline sentiment and underlying consumer plans suggests a growing risk to the economy. This is often a good environment to anticipate a rise in market volatility.
Consumers are getting squeezed by inflation, especially at the pump. AAA reports the national average for gasoline just hit $3.95 a gallon, a key psychological level that directly impacts household budgets. This is likely why we are seeing weaker buying plans for big-ticket items in the survey.
The ongoing conflict in Iran is adding a layer of uncertainty that we believe the market is not fully pricing in. Recent reports of shipping disruptions in the Strait of Hormuz are elevating geopolitical risk. We believe this suggests it is a good time to consider buying protection, as the VIX has been slowly climbing from recent lows around 14 to over 17 this month.
Market Positioning: Sector Risks and Potential Hedges
Given the drop in buying intentions, we are looking at bearish positions on consumer discretionary sectors. ETFs that track companies sensitive to consumer spending, such as retailers and travel, appear particularly vulnerable. Buying put options on these names could be a cost-effective way to position for a downturn in spending.
The labor market is also flashing warning signs, with the labor differential falling back to 6.9. This trend aligns with recent JOLTS data which showed a continued cooling in job openings to their lowest level in nearly two years. A softer job market will only add more pressure on the consumer.
On the other side of this trade, persistent high energy prices driven by the Middle East conflict could benefit the energy sector. We see potential in call options on oil futures or energy-focused ETFs. This could serve as a direct hedge against the consumer-centric downside risk we anticipate.
