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You will also be able to predict the movements in stock markets, bond markets,
and currency markets in response to the data on consumer confidence.
Consumer confidence index, what is it?
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If I'm a happy consumer, I'm more likely to shop,
travel, invest and therefore, keep the economy on a roll.
An unhappy, grouchy consumer, or
even an insecure consumer is lousy for business.
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So, any sign of failing confidence
can immediately set off alarm bells in the financial markets.
That's because consumer expenditure accounts for
a significant portion of the economy's total demand.
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For that reason, economists, policymakers, and very importantly,
traders, carefully track the temperament of households.
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So consumer confidence index, or CCI, as it's sometimes called
is defined as the degree of optimism by people like you and
me on the state of the economy.
And it's something that we are expressing
through our activities of savings and spending.
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So the consumer confidence index is actually made of two different indices,
which are then combined to calculate the consumer confidence index.
The first is the present situation's index.
Now this reflects consumers' attitudes about current conditions.
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The second is the expectations index, which represents how consumers feel
conditions would change in the next six months.
So finally, you add these two indices, and
you have the overall consumer confidence index, which is,
as I said, is based on a composite of these two indices.
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So this particular index is calculated
based on a survey because you can't have an instrument like a thermometer or
a pressure gauge to actually measure confidence, okay?
So it's based on a survey.
The survey essentially asks five questions,
three of which are about the expectations.
And two questions are about the current situation.
So the consumer confidence index is weighted wherein your
expectations index comprise 60% of the index, and
the current situation accounts for the remaining 40%.
So, [COUGH] how is consumer confidence gauged?
Okay, as I said, it's based on a simple survey
where consumers like us are asked five key questions.
The first question relates to the present situations index.
It asks, how would you rate the present general business condition in your area?
And you have to answer it in very simple terms.
You're given three options.
Is it good, is it normal, or is it bad?
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The second question is about the expectations index.
And the question is, six months from now,
do you think the economic conditions will be better,
or will they be the same, or will they be worse?
The third question is, again, about the present situations index.
The third question is,
what would you say about available jobs in your area right now?
Are there plenty of jobs, not so many, or is it hard to get?
The fourth and the fifth question is about the expectations index.
So the fourth question is, six months from now do you think there will be more jobs,
the same number of jobs as there are right now, or lesser number of jobs?
And the final question, the fifth question is, what would you guess your total
family income to be six months from now, higher, about the same, or lower?
So based on these five questions,
three of which is used to measure the expectations index and
two of them is used to measure the present situations index,
we calculate the consumer confidence index.
So based on this, essentially you gauge consumer confidence.
What is the impact of consumer confidence on stock markets, on bond markets,
on currency markets?
First the stock markets.
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Crumbling confidence by consumers is not very favorable to equities,
because it can be a bad omen for declining business sales and fading profits.
Shareholders hope that consumer confidence stays high, so
that it encourages more spending, which is of course, bullish for the stock market.
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What's the impact on bonds?
A very sharp and sustained rise in consumer confidence is worrisome for
fixed income investors, for bond investors.
That's because a sustained increase in
consumer confidence could lead to an acceleration in borrowing and shopping,
factors that can fuel faster economic growth and therefore stoke inflation.
Bond traders prefer to see consumers being less cheerful and
less optimistic about the future if not an outright pessimistic outlook.
So if consumers have an outright pessimistic outlook, that's great news for
bond investors because that will suggest a cutback in spending and
more modest economic activity going forward.
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What effect does it have on currency markets?
A depressed consumer makes foreign investors with exposure
in the domestic currency a bit nervous.
Now it raises the prospect of falling interest rates and a weakening business
climate, both of which don't bode well for the domestic currencies value.
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in search of higher yields and a stronger economy elsewhere.
On the other hand, foreign investors might sell the domestic currency in search for
higher yields and a stronger economy elsewhere.
On the other hand, an upbeat consumer can lift domestic interest rates and
stock market returns to levels that promise a higher return
relative to other regions in the world.
This normally has the effect of increasing demand for the domestic currency.
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Vaidya NathanLecturer
