The UBS consumption indicator rose 0.03 points from a weaker revised June reading to 1.64 in July, its highest level since last December.
The latest increase was the fourth in as many months since the measure hit a low of 1.390 in March following the SNB's shock abandonment of its minimum exchange rate target policy. An improved assessment of business conditions in the retail sector was the main driving force although in general retailers remain quite pessimistic due to expectations for soft sales and a continued squeeze on profit margins.
Today's results increase the likelihood of at best, only a small positive contribution from household spending to second quarter GDP growth in Friday's provisional national accounts data.
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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