Citi Eco Surprise Index troughed?

I want to take a look at the Citi Economic Surprise Index and attempt to reconcile where we are today relative to the activity in this index since 2008. Over this period, I have marked 6 separate instances between peak to trough.

As review, the index rises when economic data exceeds expectations or said differently, where economists have been too bearish on economic prospects. Conversely, the index falls when economic data proves less than expected by economists. We last saw a peak in the index back in mid-January. We can remember that at that time, just before the January FOMC, successive economic reports continued to suggest a very strong 2014. Growth forecasts both inside the Fed and on the street were revised higher. The Fed had, at the Jan. 29 FOMC meeting, improved their outlook for economic growth.

Earlier this week we saw the Fed expectations had reverted to that of December and to more of a grinding, trend like (2%ish) real GDP growth. Of course the markets have reacted to this news and have pushed out the pricing of the policy rate lift-off date as well as flattened the trajectory of the post-lift-off policy rate path.  

The periods between peak and trough that I have marked in the Citi Economic Surprise Index has ranged between 5 and 19 weeks since September 2008. The average length of those periods is 12 weeks. On  January 15th the most recent high was recorded at 70.3. Twelve weeks later, this index may have bottomed on Monday at negative 45.2.
 

Since Monday we have seen the following ‘positive’ data surprises:

Data Release

Survey

Actual

Consumer Credit (Feb)

$14B

$16.5B

Sm Biz Optimism (Mar)

92.5

93.4

JOLTs Job Openings (Feb)

4020

4173

Jobless Claims

320k

300k

Continuing Claims

2835

2776

Import Px's MoM (Mar)

0.2%

0.6%

PPI x-food&energy MoM (Mar)

0.2%

0.6%

U of Mich Confidence (Apr) P

81

82.6

 

There are three primary influences that are preventing the recent data from having a greater influence on U.S. fixed income prices. First there is the Fed’s recent release of the March FOMC meeting minutes and the perception that the Fed will less likely to raise policy rates any earlier than mid-2015 if even that soon. Additionally, economic agents have been induced to believe the Fed will carry forward with stated intention of a very shallow trajectory of the post-lift-off policy rate ‘glide-path’.

Second, Ukraine is more serious a consideration than most had initially been willing to believe and is a major unknown which all else equal would lead to additional safe haven flow for Treasuries. Finally, the equity market has fallen by over 4% since last Friday’s high and while it is too little to expect a policy response, it has entered the minds of many that further progression of weak equity prices will delay the recovery of consumer spending. Until recently softer consumer spending had been classified by the Fed in positive terms of balance sheet repair, but in the recent minutes release had been cited as ‘higher precautionary savings by U.S. households following the financial crisis.’

To sum, there is some historical perspective to suggest that the period of weaker economic surprises has lasted about as long as we might expect. The three constraining factors for greater perceived and/or actual economic growth indicated above might be consistent with this economic surprise index reaching to an important low. Should data continue to outperform expectations, there is reason to believe economic agents will adjust their expectations for the Fed’s policy path and in time, the Fed would be inclined to re-engage the rhetoric used at the January FOMC meeting.

For guide, the March Retail Sales report is scheduled for release on Monday. Those inclined to believe that economic data will continue to surprise on the upside should consider taking advantage of today’s bullish advance in U.S. fixed income to initiate short positions.

About the Author

Martin McGuire, managing director at TJM Institutional Services

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