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Consumer Confidence Slips and Inventories Surge

Market Analysis

GBPUSD, Daily            

The Michigan sentiment downtick to 98.1 trimmed the election-fueled surge to a 98.2 cycle-high in December and 93.8 in November from the 2-year low of 87.2 in October. The index has dropped back to the 98.1 prior cycle-high in January of 2015 that had marked the strongest reading since January of 2004. The pattern of upward revisions in “final” Michigan sentiment reports has disappeared, given boosts in just 8 of the last 18 months, and an average revision in 2016 of just 0.1 despite a big 2.2 November boost that was election-related. For other surveys, the IBD/TIPP index rose to a 55.6 new cycle-high in January from a 54.8 prior cycle-high in December. The Bloomberg Consumer Comfort index has averaged 45.3 over the first two weeks of January, following prior averages of a 45.8 cycle-high in December and 45.1 in November, versus a 45.7 prior cycle-high average in April of 2015.

The 0.7% U.S. November business inventory surge after a 0.1% (was 0.2%) October drop matched estimates, leaving a 1.6% nine-month price-led rise since February. We saw a 1.0% pop in retail inventories that matched the rise from the advance indicator report, alongside a 0.2% already-reported rise for factories and a 1.0% wholesale increase that beat the 0.9% advance figure. We still expect Q4 GDP growth of 1.6% with a $21 bln inventory addition and a still-lean $29 bln accumulation rate that extends the $16.5 bln addition in Q3, as inventories are now reversing a big five quarter inventory headwind that culminated in a $9.5 bln liquidation rate in Q2. Risk for the economy can be seen in the lofty inventory-to-sales (I/S) ratio, which rose to 1.38 in November from 1.37 in October but the same 1.38 in September, leaving the ratio only modestly below the 1.41 expansion-high over the three months of Q1.

The dollar was unmoved by the business inventory and Michigan sentiment data, where the latter was shy of expectations. The greenback remains at or near session highs versus major currencies, with the post-Trump press conference disappointment apparently now fully running its course.

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Stuart Cowell

Market Analyst

HotForex

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