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Schork: Consumer Confidence Sluggish, but Up

Tuesday saw the Conference Board’s consumer confidence index rise to 50.2 in October, above the 49.9 expected by analysts but still sluggish compared to historical norms. September was revised slightly higher from 48.5 to 48.6.

In historical terms, the year-on-year change reversed from an 8.99% deficit in September to a 3.08% surplus in October. Yet we remain well off the 94.42% YoY surplus seen in March, and we are 34.18% below the ten year average. The Present Situation index increased slightly from 23.3 to 23.9 but the larger gain came from the Expectations index, which rose from 65.5 to 67.8 – it seems consumers are expecting an improvement post mid-term elections.

If home sales could be used as an indicator for consumer confidence, what can the latter be used as an indicator for? The USDEUR would be a contender. As illustrated in today’s issue of The Schork Report (request copy), we graphed consumer confidence against the dollar, along with changes in the Federal Open Market Committee’s (FOMC) rate decisions.

Expectedly, confidence and the USDEUR move in tandem (a weaker dollar makes imports expensive and vice versa) outside of federal fund decisions, which cause a short term discrepancy as the dollar strengthens but confidence decreases as consumers worry about the cost of borrowing or vice versa.

"As soon as consumers begin spending big, the FOMC will have to weigh whether to hike interest rates to curb inflation. That fear of interest rate hikes could lead to speculative strength in the dollar which tends to lead to weakness in crude oil."

Thus while the correlation was an inverse -0.534 when the Fed decreased the rate to 0.25% in December of 2008, it has shifted in to positive territory as of writing, currently standing at a firm 0.473. As soon as consumers begin spending big, the FOMC will have to weigh whether to hike interest rates to curb inflation. That fear of interest rate hikes could lead to speculative strength in the dollar which tends to lead to weakness in crude oil.

Thus analysts at The Schork Reportmaintain our bearish bias in advance of the FOMC’s next meeting on Nov 2-3.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.

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