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01 Sept: Three issues with sentiment

| Posted by: Paul Donovan | Tags: Paul Donovan

  • The oil price has taken three days to reverse a month of declines – it is as if August did not happen. Fed comment and Bank of England comment have both been rather dismissive of general financial market moves as drivers of policy – the volatility of the oil price is perhaps a reminder of why that might be sensible.
  • Manufacturing sentiment is due from Europe and the US (China's data was in line with expectations). There are three issues to bear in mind. First business sentiment should not react to financial market moves, unless those moves are driven by changing economic information.
  • Second business sentiment is supposed to reflect real business activity (especially in the detail) but humans tend to think in nominal terms – there may be confusion, therefore, which is pertinent when there have been significant currency moves.
  • Third, sentiment tends to react to media reporting rather than reality, and media reporting has been more extreme than reality, meaning that sentiment data tends to overreact. This all goes to paint a more confused picture for the sentiment figures from Europe and the US.