Huy, huy…
ConsumerConfidenceCollapses – BiggestMissOnRecord
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Thisisthefirstconsecutivemonthlydropin 14 monthsandthelargestmissvsexpectationsonrecord. Printing at 76.8 (against an expectation of 82.0), this is the lowest in 5 months and points to the picture we have been painting of a consumer increasingly affected by rising rates and soaring gas prices amid stagnant incomes. As Citi notes below, this is the exact same pattern we have seen play out in the last 2 cycles and suggestsignificantdownsiderisktoUSequities. The economic outlook sub-index collapsed to its lowest since January.
Biggest miss on the headline data on record…
as the economic outlook subindex dumps…
ViaCiti,
Isconsumerconfidencesettoturn?
Consumer Confidence is once again following a dynamic where we see it move higher for 4 years and 4 months before beginning to collapse
Moves higher from 1996-2000 with a smaller dip halfway through in October 1998 Moves higher from 2003-2007 with a smaller dip hallway through in October 2005 Moves higher and so far tops out in June 2013. Also sees a small dip halfway through in October 2011.
Higheryields do nothelpconfidence…
A sharpriseinmortgagerates has a negativefeedbacklooptoconsumerconfidence. For those families and individuals that were now looking/able to enter the housing market, the recent spike in rates acts as a headwind.
In addition to the economic backdrop, there is plenty of tail risk as we head into the end of the year. Oilpriceshavebeenrisingsincethesummerbegan (and in reality since the Summer of 2012), partially due to geopolitical risks which are very much “top of mind.” A bigger spike due to a supply shock would choke the economic recovery.(In our view)
In the US, the appointmentof a new FedChairman and the upcoming budget/debt ceiling debates are likely to bring added volatility. Tapering itself can also induce concern as the “Bernanke put” is being removed from markets.
InEurope, manyofthestructuralproblemsrelatedtothe single currencyunionhavenotactuallybeenaddressed and the peripheral countries could still create turmoil going forward (see Fixed Income section focusing on Italy in particular for more on this). There has also been little concern with both the German elections and the German Court decision on the constitutionality of the OMT program. A surprise in either of these could be cause for concern.
EmergingMarkets are stillnotoutofthewoodsyet as growth has been weak relative to expectations and countries with current account deficits are beginning to feel pressure in their FX and Bond markets. This is an issue we believe is only starting to develop which we will continue to expand on at later dates.(We have also looked at this in our EM FX section this week)
Overall, theweakeconomicbackdrop, poorhousingrecoveryandpotentialfortailriskeventsoverthenextfewmonthssuggestthatwehavetoppedoutinConsumerConfidence, a warningsignforequitymarkets.
TherelationshipbetweenConsumerConfidenceisclear, andIFJunedidmarkthehighandConfidencecontinuesto decline, thenwewouldexpecttoseethattranslatetoweaknessintheequitymarkets. Theremovalofthe “Bernankeput” onlyaddstothisconcern.
A major turn has taken place in equity markets on average four months after Consumer Confidence turns, which would point to a decline beginning around September-October. As we have previously expressed, we remain of the bias that a correctioninequitymarketsontheorderof 20%+ islikelythisyear/ into 2014 andthecurrentdynamicssupportsuch a move.
Should we see a decline of that magnitude, it is almost certain that yields would move lower in a rush to safe assets.
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