Friday, May 16, 2014

UPDATE: Citi Eco Surprise Index; Troughed but Yields LOWER...




Last month we looked at the Citi Economic Surprise Index , only days after the April 7th -22 low.  Based on the average length of time between peak and trough in this index over the last 6 years, it was suggested we ready for a basing and recovery in this index.  This series has since recovered to -7.4 as of yesterday and we should expect the surprising strength in housing numbers today to further boost this index.
 
Price action in U.S. fixed income may seem at odds with this trend in economic data and expectations.  Intuitively, we might expect that as economic data proves stronger than expected, interest rates might rise to reflect the stronger growth and prospects for a less accommodative Federal Reserve monetary policy stance in the future.  Instead, since April 7th, yields have fallen despite a growing trend toward positive economic surprise.

Looking back at the chart referenced in the April 11th note, I have added in some detail.  I have referenced (blue circle) the subsequent peak in the rolling 9th Eurodollar future following the troughs in the Citi Economic Surprise Index over the last 5 major cycles.  

Citi Eco Surprise Index - Changes in Rolling 9th Eurodollar Price

Trough Date
ED 9th Price
ED 9th Peak Date
ED 9th Price at Peak
# of Weeks
Price Chg
11/2/2009
97.43
11/27/2009
97.61
1
0.18
8/25/2010
98.63
11/4/2010
99.10
10
0.47
6/2/2011
98.50
9/19/2011
99.38
16
0.88
6/20/2012
99.24
9/14/2012
99.47
12
0.23
2/1/2013
99.26
5/2/2013
99.46
13
0.20
Average


Weeks & Price Chg
10.4
0.39

Recognizing that the above data set is not particularly robust, we are cautioned against drawing to strong a conclusion on what may be forthcoming.  To complete this exercise however, I would note that the average Economic Surprise Index trough date to the date of a subsequent rolling 9th Eurodollar  price peak was about 10 weeks and the average price change was an increase of 39 basis points.  We should note that all price changes noted were positive.
Finally, a review of prior ED 9th price action following a trough in the Citi Eco Sruprise Index would point to a mid-June peak in EDM6 at 98.71. 
·        The blue circles on the chart indicate the post Citi Index ED9th price peak  
·        The red vertical line indicates Citi Index peak
·        The green vertical line indicates Citi Index trough
·        Average number of weeks between Citi Index peak to trough last 5 is 12 weeks


·   From: MARTIN MCGUIRE (TJM INSTITUTIONAL SE)
At: Apr 11 2014 10:55:23
'Citi Eco Surprise Index Troughed? How to Proceed!'

Borrowing somewhat from something I saw from CS, 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 January 29th 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.

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