When learning about financials, the first thing teachers tell you is that sentiment is everything in the economy. The second is that every economy is based on people; how they interact with each other and the products and services in the country or region.
This figure is called consumer confidence, one of the most influential factors in the well-doing of a country.
Consumers are the heart of an economy, but confidence is the blood of a country, why? Because people are the ones who make the economy and countries work, but confidence is how they interact with it.
If you feel good about how things are going in your country, you will be happier and more willingness to buy things. However, if you are concerned or sad, you are going to put your money in your pocket.
Today, we are going to talk about an economic report that talks specifically on how people feel regarding the economy of a given country. Keep reading and know more about the Consumer Confidence report.
Discover how to read the data, understand how it affects the Forex market, and learn how to trade the consumer confidence index to make money in Forex.
What is consumer confidence
The Consumer confidence index, CCI, is a leading economic indicator that measures how people are feeling about the overall state of the economy, the country, and their individual financial condition.
The CCI measures how optimistic or pessimistic consumers are concerning the economy in the near future. So, it is a barometer of the health of the economy, and it helps to identify short term trends about the consumption and finally about the well-doing of the economy.
If people are optimistic, they will tend to purchase more goods and services, and finally, they will stimulate the economy. However, if they are pessimistic, they will save their money for better times, and the economy will have a deceleration.
In the United States, the Consumer Confidence Index is published by the Conference Board monthly at 10 a.m. ET on the last Tuesday of every month.
Every Consumer Confidence report delivers three numbers:
- Consumer Confidence Index, which is a number combining the current situation and expectations for individuals and families. The two components are:
- The Present Situation Index, which is “based on consumers’ assessment of current business and labor market conditions.”
- The Expectations Index, “based on consumers’ short-term outlook for income, business and labor market conditions.”
The survey is collected through a probability sample from the household universe. “The frame is first stratified geographically within the census division to provide a proportionate geographic distribution, after which a systematic sample of household addresses is selected,” the CB website says. “The sample addresses are then used for the mailing,” and around 3,000 completed questionnaires are accepted every month.
Other Consumer Confidence reports in the world
Japan: Consumer Confidence Survey by the Cabinet Office
Eurozone: Consumer Confidence released by the European Commission twice per month
Germany: GfK Consumer Climate published by the GfK, Growth from Knowledge
Switzerland: SECO Consumer Confidence Survey
United Kingdom: GfK released by the GfK Group
Canada: Index of Consumer Confidence by the Conference Board of Canada
Australia: Westpac Consumer Confidence by the Faculty of Economics and Commerce Melbourne Institute
United States: The U.S. also published the University of Michigan Consumer Sentiment twice per month.
How to read the Consumer Confidence index
When it comes to reading the consumer confidence report published by the Conference Board in the United States, the number 100 is the magic level.
The region of 100 is usually seen as a neutral level; however, a number below 75 is perceived as a weak figure. On the other hand, above 125 is a healthy number.
A significant drop in confidence can signal that the economy is slowing down and the country is heading to weak PMI or durable good orders. However, a good number will be seen as positive for the economy and a signal of a possible interest rate hike as more purchases will produce more inflation and also an overheating of the domestic economy.
Considerations and what to think before trading consumer confidence
Although the report is a well-followed economic indicator, some people believe that the homogeneous condition of the typical consumer, which is the base of the consumer sentiment report, is no longer valid. It worked back in the second half of the past century; however, the current situation is not the same in times when we are living technological revolutions in a hyperconnected world.
Think that an event in China or a bad economic data in Europe could hurt the sentiment of the American consumer, and vice-versa.
Researchers consider that a more heterogeneous sample that works as a supranational index would provide a better image of the consumer. Another possibility would be a conjunction of several consumer confidence reports of a given region or countries who share the same size of the economy.
As for now, traders can follow the different reports separately, but there is nothing that has the data for several countries in the same story.
A good approximation in the Forex market is the FXStreet Forex Forecast currency sentiment tool created by Mauricio Carrillo in 2010. It is a report that selects well-followed experts that are leaders of opinion around the FX world. Then, the index calculates trends for the next week, month, and quarter.
However, the Forecast currency sentiment contains only Forex, BTC, Gold and Crude Oil, not consumer sentiment.
How to trade the Consumer Confidence Index
As Consumer Confidence reports discover the level of confidence of everyday people in a given country or region, a strong or better than expected number will fuel the currency of the country to the upside. On the other hand, a weak consumer sentiment reading will push the money to the downside.