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The Bloomberg CCI: The high-end consumer spending may increase

Phalguni Soni

Do last week’s economic releases support the Fed’s tapering stance? (Part 5 of 10)

(Continued from Part 4)

The Bloomberg CCI

The Bloomberg Consumer Comfort Index (or Bloomberg CCI) is a weekly indicator measuring the consumer sentiment in the U.S. The Bloomberg CCI was released on Thursday, March 20, for the week ending March 16. The Index reading came in at -29 compared to a reading of -27.6 reported the previous week.

 

A decrease or increase in consumer confidence is likely to impact the consumer discretionary sector. One ETF that invests in the sector is the State Street SPDR S&P Retail ETF (XRT), which is composed of the retail sub-industry portion of the S&P TMI. Top ten holdings in XRT include the national retailer, Walgreens (WAG), which would be affected if the decrease in consumer sentiment is more than just a blip due to temporary conditions affecting food prices and energy. Energy price pressures, brought on by higher heating costs, are likely to ease as summer approaches, although food prices may bear the impact of the drought in Western U.S. for a longer time-frame.

How would decreases in consumer sentiment affect fixed income ETFs like BND and VMBS?

A decrease in consumer sentiment will imply that consumers may curtail discretionary expenditures in the future. Other factors remaining constant, decreases in consumption expenditures decrease the GDP. Decreases in GDP, would imply the economy is contracting. Interest rates usually fall when the economy is in a recession as policy makers embark on economic stimulus to revive growth. This would lead to an increase in bond prices, other factors remaining constant. This would impact fixed income ETFs like the Vanguard Total Bond Market ETF (BND) which primarily invests in investment-grade bonds in the U.S. with a maturity in excess of one year.

At last week’s FOMC meeting, the Fed announced a decrease in its monthly bond buying program to $55 billion per month from $65 billion per month. A reduction in the monthly bond purchases would imply lower liquidity, and, other things remaining constant, interest rates would increase and bond prices would decline, particularly affecting longer-term Treasuries (and ETFs like the iShares 20+ Year Treasury Bond ETF (TLT)) and agency-backed securities (and ETFs like the Vanguard Mortgage-Backed Securities Index Fund (VMBS)).

So, as this is a weekly indicator, investors need to be wary of sudden week-on-week reverses that may arise due to temporary supply or demand conditions in the economy (in this case higher energy costs due to the cold winter and food price increases brought on by the drought in Western U.S. affecting lower-income consumers).

Higher-end purchases may get a boost

A decrease or increase in consumer confidence is also likely to impact the consumer discretionary sector. One ETF that invests in the sector is the State Street SPDR S&P Retail ETF (XRT), which is composed of the retail sub-industry portion of the S&P TMI. Top 10 holdings in XRT include online travel companies, Expedia (EXPE) (1.25% of fund assets) and TripAdvisor, Inc. (TRIP) (1.23% of fund assets), who may benefit as sub-index measuring buying climate rose to from -39.3 in the week ended March 9, to -38.1 in the week ended March 16.

Unlike lower income consumers (income less than $15,000 p.a.), buying sentiment for higher income households was unaffected. Higher-income consumers may spend more on vacations than lower income households. Last quarter (Q4 2013), Expedia’s (EXPE) gross bookings jumped 21% as the company beat consensus profit estimates. In 2014 too, Expedia’s (EXPE) gross bookings growth is expected to be higher than long-term averages.

Part 6 talks about the economic indicators released last week that may often predict turning points in business cycles.

Continue to Part 6

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