The University of Michigan consumer sentiment index rose 4.7 points to 63.9 in the preliminary report for June. This is the highest since 67.0 in February. The reading is above the consensus of 60.0 in the Econoday survey of forecasters. The increase reflects a gain of 3.1 points to 68.0 for the current conditions index and 5.9 points to 61.3 for future expectations.

While the index level remains weak in historical terms, consumers so far this month are responding positively to signs that inflation is easing and are also showing less concern that a slowing economy will hurt the labor market. There also may be some hope that the upward trajectory of borrowing costs has topped out.

The biggest surprise in the report is a 0.9 point drop in the 1-year measure of inflation expectations to 3.3 percent, the lowest since 3.1 percent in May 2021. Part of this is the decline in gasoline prices, but consumers may be seeing relief in other areas like food prices and perhaps in the rate of increases for rents. However, the 1-year measure is for the short term. The 5-year inflation expectations measure more consistent with the Fed's medium-term for inflation is down only 1 tenth to 3.0 percent in the preliminary June report. This is in line with the narrow range of readings since late 2021 of 2.9 percent to 3.1 percent. The steadiness of the 5-year consumer inflation expectations points to the stubbornness in core inflation and the challenge that faces Fed policymakers in addressing services inflation while commodities inflation is moderating in response to past rate hikes.

Today's report leaves Econoday's Consensus Divergence Index at zero to indicate that results are coming in right at Econoday's consensus forecasts. When excluding prices, the reading moves to plus 10 to indicate slight outperformance of the real economy.

Consumer sentiment in the first indication for June, which tumbled in May by 4.3 points to 59.2, is expected to rebound but only a little, to 60.0.

The University of Michigan's Consumer Survey Center questions households each month on their assessment of current conditions and expectations of future conditions. Preliminary estimates for a month are released at mid-month and are based on about 420 respondents. Final estimates are released near the end of the month and are based on about 600 respondents.

The pattern in consumer attitudes and spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth.

This balance was achieved through much of the nineties and, in large part because of this, investors in the stock and bond markets enjoyed huge gains. It was during the late nineties that the consumer sentiment index hit its historic peak, reaching levels that were never matched during the subsequent 2001 to 2007 expansion nor during the long expansion following the Great Recession.

Consumer spending accounts for more than two-thirds of the economy, so the markets are always dying to know what consumers are up to and how they might behave in the near future. The more confident consumers are about the economy and their own personal finances, the more likely they are to spend. With this in mind, it's easy to see how this index of consumer attitudes gives insight to the direction of the economy. Just note that changes in consumer confidence and retail sales don't move in tandem month by month.