Consumer Confidence



May’s Conference Board Consumer Confidence report is the latest piece of data
to suggest that recent months have seen a significant strengthening of the US
economic cycle and we are unsurprised that the strong rebound in housing,
together with the breakout by the SPX index to all-time highs generated a
substantial upside surprise in the index.

Overall Confidence rose to 76.2 (1985 responses = 100), well above expectations
of 71.2 and the strongest report since February 2008. More interestingly the
Present Situation report led the breakout, rather than Expectations. The
Present Situation index rose to 66.70, its highest level since May 2008 while
Expectations remained range-bound at 82.40 (this much more volatile index has
been between 50 in October 2011 and 97.50 in February 2011 over the last three
years). This suggests that the audience was responding to an appreciable change
in actual circumstances rather than some nebulous hope for the future. As can
be seen on the attached chart, the Present Situation index tends to trend
powerfully and has historically been closely linked to the direction of local
US monetary policy (using the FDTR to define the latter). This is hardly
surprising since both consumers and the FOMC respond to similar data inputs and
although neither has been shown to be particularly prescient at the great
turning points of cycles they have both generally responded accurately to
upside and downside acceleration of trends.

We therefore would view the breakout of consumer confidence as another signal
that the FOMC’s current bond purchasing program is at risk of ending sooner
than most observers expect, although we doubt that the FDTR will be touched for
a considerable period of time.

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