Sagging Consumer Confidence Boosts The Dollar

Negative sentiment on the chances of global recovery seem to have set in after last

year's ending months' report by the Conference Board suggested that US consumer confidence fell a second consecutive month. The consumer confidence index prepared by the Conference Board fell to 47.7 in October from 53.4 in September. Economists were widely expecting the October figure to be around 53.1. This unexpected steep fall coupled with the prevailing high unemployment rate seems to have gotten investors worried about the strength of the global economic recovery. A reading of 90 for the index indicates an economy on a good footing and a reading of 100 is suggestive of growth.

Sagging consumer confidence does not bode well for the US economic recovery as nearly 70% of the US economy is driven by consumer spending. Lower consumer confidence indicates lower consumer spending and a lower rate of job creation, indirectly lowering consumer spending as unemployment perpetuates itself. The timing of the falling consumer confidence also seems to be unfavorable, with the holiday season just around the corner, when retailers hope to generate peak sales. The Conference Board also indicated that shoppers plan to cut back on their spending as they do not trust the job market. It appears that a persistently weak job market seems to have shaken the confidence out off consumers, with the present unemployment level of 10% expected to shoot up to 10.5% by next year.

This fall in the index has come in the face of firmer property markets, better corporate results and stronger stock market performance. The S&P Case Shiller index of prices in 20 US cities was up by 1% in August compared to July. Its upward August march was for a consistent fourth consecutive month suggesting a consistency in recovery. However, it appears that the any improvements in the economy are yet to translate into economic security for the consumer.

It appears that the fall in the consumer confidence index led to the return of risk aversion and the US dollar moved up, with jittery investors selling their riskier holdings and returning to the safe cover of dollar denominated US government holdings. The other indicator of the return of risk aversion is the spiking in the Yen, which usually is another safe haven currency. The rise in the dollar was accompanied by a fall in major sock indices across the world.

All said and done, ups and downs are to be expected as the economy is on a course correction and this downturn may just have been a correction waiting to happen as investors need to book profits. They found this to be an opportunity to book profits and in the bargain stock markets wobbled and the dollar perked up. The real news yet to come in is the US GDP data, which is expected to grow 3.2% for the quarter after successive negative growth quarters. If the US manages to deliver good news on this front the markets may go back into the positive mode and the dollar may ease off yet again.

by: Pete Migz

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