Oh, I think it angered Micael plenty, especially Kay and her "Sicilian Thing" remark, showing what she really thought of his ethnicity. I think that Michael never showed anger, period. He would never respond to any insult, just like Vito with Signor Roberto. Michael and Vito both found anger counterproductive, a lesson that Sonny should've learned.
I never looked at her comments as a racial slur. I don't think she had a problem with his ethnicty. She had a problem with the family business and actually put up with a lot.
I think she was repulsed by the way of life that Michael had originally condemned, but later embraced.
