Interest rate rises are failing to produce a strong cutback in consumer confidence So far this year ...
Interest rate rises are failing to produce a strong cutback in consumer confidence
So far this year the Fed funds rate has risen by 50 basis points to 5.25%. In the UK such a sharp rise would have had a large impact but the US consumer is not so tied to the direction of mortgage rates
Consumer confidence has soared in the US since 1993 and it is continuing to grow, though at slower a rate year on year August's retail sales were up by 10% and inflation remains around 2%. Fund managers have subsequently not rotated their portfolios out of consumer cyclicals in light of the two 25 basis point increases during the summer
Alison Wright, fund manager at Britannia Asset Management, says: "Consumer confidence is more tied into the stock market as there are a huge number of retail investors in the country. Since the market has continued to grow and there is a low level of unemployment retail sales have remained strong
Another factor that affects the level of consumer confidence is the housing market. Recently the Bank of England raised interest rates to try to avert a housing boom and, indirectly, inflationary pressures caused by consumer spending. In the US a rise in interest rates does not have the same effect on mortgage repayments as it does in the UK
Grant Wilson, fund manager at Martin Currie, says: "The majority of mortgages in the US are on a fixed-rate basis and based on long bond yields. The only time when mortgage holders are interested in the movement of interest rates is if these go down below the rate they are paying on their existing mortgages
"At the end of 1997 and throughout 1998 there was a boom in refinancing mortgages. The holders would pay off their old mortgages by taking out a new ones at a lower rate. There was actually a tendency among financial institutions when they noticed the rate was below a client's current mortgage to inform them
"Refinancing gives the mortgage holder an increase in spending power. What usually happens is that the length of the mortgage is reduced from, say, 12 years to nine years. It makes the holder happier and they feel they have more money to spend
Bill Smith, investment strategist at Henderson Investors, agrees that a rise in interest has less of a direct effect on US consumers than it does in the UK but believes there is an indirect influence
He says: "A rise in the Fed funds rate impacts on businesses and their ability to borrow money and service existing debt, which in turn affects their profits and share price. There has certainly been a slowing down in the growth of the stock market which can be seen as contributing to the slowdown in the growth of consumer confidence
"A rise in rates also reduces consumer spending through a substitution affect consumers chose to save more in light of higher interest rates. Although the savings ratio in the US is low, consumer spending is still affected by a rise
While Wilson recognises that consumer confidence is still high. He is underweight in retail stocks. He says: "The retail sector is so competitive that company margins are being pressed. In addition, competition is likely to increase further with more and more retail buying occurring over the internet. One trend we are playing on is the ageing population in terms of healthcare and financial services
Wright is also going to maintain her underweight position in consumer cyclicals. She says: "In the medium term we plan to play the companies that will benefit from the strengthening international economy
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