The UBS consumption indicator posted a second successive increase in March. From a slightly firmer revised base of 1.21 in February the headline index gained 0.14 points to 1.35, its highest reading since December.
March's outcome suggests that the initial shock of the SNB's dramatic abandonment of its EUR/CHF1.20 minimum target level in January has now been absorbed and households have started to get used to the new policy environment. Indeed, new car registrations climbed some 24 percent on the month, a remarkably steep increase in the wake of the hike in carbon emission taxes at the start of the year. However, retailers are far from convinced and sentiment in the sector fell 3 points to minus 13, its lowest reading since the end of 2011.
Today's results should be consistent with modest pick-up in consumption at quarter-end. However, the mixed composition of the indicator leaves an uncertain outlook and it remains unlikely that household spending will make much of a contribution, if any, to real GDP growth in the first half of the year.
The UBS consumption indicator tracks changes in real consumer spending and can be used as a gauge of the strength of domestic demand. A rising indicator value reflects rising consumer spending, which generally leads to economic growth and potentially augur inflationary pressures to come.
Consumer spending accounts for a large portion of the economy, so if you know what consumers are up to, you will have a pretty good idea on where the economy is headed. Needless to say, that is a big advantage for investors. The UBS consumption indicator is calculated using five specific indicators of spending and expressed in the form of an index. These indicators are: new car sales, business trends in retail, overnight hotel stays by Swiss nationals in Switzerland, the consumer sentiment index and credit card transactions. Because the index value is always positive, markets compare the current index value to the short and long-term average values in order to gauge Swiss economic health. In the long term the average has been approximately 1.5, but may change with time. The pattern in consumer spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth.
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