Central banks are finalizing the latest data checks to see when (or, in some cases, if) they can start easing. That includes close scrutiny of inflation, naturally. The biggest driver of inflation is the consumer confidence. With market speculation about potential moves in the BOJ and the ECB next month, there is particular attention on indicators that could provide some clues on how inflation pressures might evolve.
The broader question for markets is also whether to expect a general trend towards optimism, or a return to cautious trading that could benefit safe havens. The recent upsurge in market sentiment has pushed key risk indicators into overbought territory. With US equities hitting all time highs, so is the price of safe havens, like gold. Does that imply a market correction is on the way? And what would that do to the currencies market?
How It Connects to Rate Cuts
The normal dynamic of the law of supply and demand is that if prices rise (inflation) then demand should reduce. Measured in macroeconomic models, that would be a drop in the consumer confidence. But, there are some confounding factors, as the recent boom in inflation shows. People might still keep consuming even with higher prices, and instead borrow money to make up the difference. Credit card debt has been increasing over the last year, as a sign of this phenomenon.
So, in order for inflation to turn around and stay down, presumably there would have to be some weakness in consumer confidence. This was the big problem that the BOE was facing last year, with high inflation but still resilient consumers. Higher interest rates are meant to reduce the availability of credit, which also impacts consumer sentiment.
Too Much of a Good Thing
On the other hand, if consumer sentiment is hurt too much, then the economy can slow down. Enough to fall into a recession, which is also a problem for the central bank. So, while they want to see a drop in consumer confidence indicators before easing up on monetary policy, if those indicators drop too much, then central banks will have to start easing.
Therefore, consumer confidence measures are a helpful leading indicator for what central banks might do in the current circumstances. Better than expected consumer confidence might mean a delay in rate cuts in Europe, US; and increase the chance of a rate hike in Japan. Weaker than expected consumer confidence might delay a BOJ hike, but shore up bets about the ECB’s move in June, and the Fed’s move in September.
What to Look Out For
Tomorrow is the release of US Conference Board Consumer Confidence, which is expected to slip further to 94 from 97, which is down from the over 100 level that has been maintained through the early part of the year. Here the specific level isn’t as important as the direction, as markets way changes in consumer sentiment.
Wednesday sees Japanese Consumer Confidence, which is expected to improve to 39.0 from 38.3 prior, a substantial change. Meanwhile German GfK consumer confidence is expected to show a similar pattern, improving from -24.2 to -23.0.
