MARTIN SLANEY<br /><strong>HEAD OF DERIVATIVES, GFT</strong><br />CONSUMER confidence is fundamental to market mood, and even more so when the prospect of economic recovery has been touted but not yet assured. Confidence is the building block of spending, which is critical to recovery. And right now confidence is taking a big dip.<br /><br />The bimonthly Reuters/University of Michigan preliminary index of consumer sentiment released last Friday might not seem like it has much market-moving potential, but it is fast becoming one of the&nbsp; numbers most watched by traders due to its close relationship with expenditure.<br /><br />After four months of gains, Friday&rsquo;s release showed that the confidence gauge crumbled in July to 64.6 from 70.8. Against analyst estimates of a much more modest dip to 70.0, this signalled a basic change in consumer attitudes.<br /><br />But is the survey indicative of what ultimately happens in the economy? With the weight of the world&rsquo;s markets placed on the shoulders of this indicator, it&rsquo;s important to know whether it&rsquo;s justified.<br /><br />The Survey Research Centre at the University of Michigan &ndash; which has conducted these surveys since 1946 &ndash; suggests that the surveys and the actual data move in line 75 per cent of the time, with consumer expectations leading the actual economic data by approximately two quarters. A closer comparison with official retail sales data seems to suggest that while month-by-month correlation is poor, the longer-term trend correlation is good.<br /><br />Conveniently, there is a six-monthly figure released as well, which does track the direction of consumer spending. Ominously, this also nose-dived, to 60.9 from 69.2 &ndash; the biggest monthly drop since October. The news capped a poor week for US stocks and helped to send oil below $59.<br /><br />After such strong moves from the sentiment index, was last month just a blip? With the second-quarter earnings season looming large, that would be a bold call. As forecast here last week, it points to a summer of, if not of discontent, then at least disillusion &ndash; and plenty of volatility.