Citi’s Economic Surprise Index Takes a Dive
The last time we posted the Citigroup Economic Surprise Index the market was starting to reverse off new highs as the index was taking a nosedive. It proved a pretty reliable leading indicator. I like this index because of its uniqueness. It’s an intuitive index in that it compares current sentiment to expectations. That is, it compares actual economic data to the analyst’s expectations. So when the analysts finally reverse course and start to downgrade the outlook the index generally leads their views.
The latest readings here show a large reversal from the highs. Analysts are finally starting to follow the data lower so there’s a sort of self equilibrating factor at work in this index. But the following comments bring up an equally interesting point as this index moves lower. Over the last few years the deep moves lower have tended to coincide with policy actions. If there’s one thing we know from recent years it’s that the market is like a crying baby who needs that pacifier in its mouth every time anything starts to go remotely wrong. And central banks have always been there to give it to them. The market obviously let out a wailing scream last week after Ben Bernanke failed to follow-thru with the big QE3 pacifier. But if this index is any indication of what’s to come we are likely on the verge of increasingly aggressive policy talk and action (Via Short Side of Long & Abnormal Returns):
“Economic data has been weakening meaningfully relative to economist’s expectations in every major global region, according to the Citigroup Economic Surprise Indices. Previous instances where economic data disappointed on similar scale, have led to central bank intervention and it is definitely possible we might see that occur again prior to both the US and German elections. Having said that, previous “money printing programs” have only helped the private sector business activity modestly at best, while we have not been able to reached escaped velocity within the current business expansion. In other words, the expansion has failed to become self sustaining. Therefore, ever summer economy weakens, global investors start asking if we are edging closer to another recession?”
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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25 Comments
More bailouts. What else should we expect?
Ben to the rescue with the famed wealth effect!
Notice that although the decline in the surprise index is (so far) smaller than it was during 2011, the decline is very much even all around the world. BRICS won’t pick up the slack this time ’round.
good observation. Another blow to the theory of US “decoupling”…..
Excellent point – EMs leading the way lower, much like 2008.
That’s what’s different about this summer vs the past two – not only do you have the Euro crisis, you have global growth truly faltering.
There are no remaining legs to the stool.
“…no legs”
True, and I think dangerously true. The media blames almost every market hiccup on the EU, when in fact weakening growth is really the story. Yeah, they are somewhat linked of course, but I want to short a really vicious rally in risk if the summit comes up with something the market thinks is viable this week. Viable is viable, but viable isn’t in this case going to be instant. The die is cast, I’m afraid, and political problems in the US may exacerbate as the year drags on. Not only have all the legs fallen off the stool, all the engines have stalled.
Gold will sink to 600 $ may be less.
Great thorough analysis thank you
If Golf sinks to $600, S&P 500 will be at 60 points and Treasury Bonds will be worth $6.
we would have a revolution before SPX got to 60.
It got close to 60 in 1974 (63.5). To get to 60 you would have to go back to the 1960s. Even retracing the entire runup of the 80s, 90s, and 00s would only take the S&P back to 100. Ain’t gonna happen.
Yup, all it should take is an incremental 10%-20% downside in the SPX and you’ll get that action.
The last time (previous article) the CESI seemed like a coincident indicator (to the financial markets), or maybe I didn’t understand the importance of the index?
The proper way to use this index should be to filter out bad those who are wrong.
When the selected Economists give their focasts as part of the sample and they turn out to be wrong then you remove them until this index no longer looks like a yo-yo going up a d down but a smooth line.
In any other profession a monkey would look at the citi surprise index and conclude the following
Why do you humans f follow an index from a group of people that have been so wrong on the direction of the economy?
Until you can get the right group of PhD prophets to smooth out those lines all this tells me is parts of finance onto he’s it’s fascination with asking the same people who got them lost for directions.
BTW- I’m glad Bernankes team is back up to 5 as it was in 2005. Yep having 5 intelligent economists was just the perfect mix of unelected academics to foster stability and calm into the markets.
iPhone post. Terrible grammar sorry
LTRO 3 may be coming from the ECB, and possibly sov bond purchases in the secondary market. Will that be enough of a positive surprise to turn the trend to a bullish direction?
Perhaps. But every kick the can move from the ECB/EU has lasted less time than the one before. So it could be a very short bounce.
The Economic Surprise Index has not been coming up on it’s old symbol on Bloomberg.com for several weeks. Is there anywhere to view this index at no charge anymore?
I agree, been looking for it as well. Anyone have a source?
Yeah, I’d love to know where to find this data now. Thanks.
“have led to central bank intervention and it is definitely possible we might see that occur again prior to both the US and German elections”
Question: That’s it right? “intervention by Central Banks”! Having spent most of the weekend working on how to play outcomes and what I should write to my clients this quarter end…that is it right?
I read NOTHING this weekend which didn’t coclude that the market had a chance because it was failing and would get more from those who helped it fail.
Which has me asking the following question. What is it that makes YOU(who eve you is) want to be long here?
Before you answer that…I want you to play a stupid game with me. Tease me if you will. Assume NO central bankers will bail your longs out. Take a look at the economy by itself with out any of the gimmicks and easing YOU have come to expect or accept as your right.
Please list a couple of reasons why you want to be long today. Because every piece I read was you must not worry because here comes more easing. What else is there? Maybe I’m just not reading the right stuff.
But if your going long or investing purely on central banker hopes then let’s call it what it is.
Anyway…Best to all of you this week..Going to Europe on holiday and will be meeting for the first tiem “Inaccounting” for a drink in London.
That would have never happened had we not shared stuff on the TPC. Thanks CR..and yes I’ll be checking the market every hour on holiday. My wife knew what she married..it’s part of the package.
@VII, hope you and your family enjoy your European vacation.
You asked: “Please list a couple of reasons why you want to be long today”. OK, I am long utilities (XLU) because the yield at 3.9% is more than double the yield on 10 yr Treasury, and because you gotta pay your electric bill. I am long consumer staples XLP, because even if we have a recession, people still buy the basics, and the yield is 2.3%. Today I am losing on both, but over the next 12 months these should provide a balance to my bond investments in DBLTX, BOND, LQD, and VCLT.
I don’t see a good reason to hold much at all in the SPX today, although I do hold a little bit for diversification.
I’m with you Larry. Over the last 6 months or so, I’ve transitioned to a huge overweight in dividend payers. About 3/4s of my holdings are paying me 2-4%. Of course, I am also considering retiring in a few years, so that has something to do with it.
I’ve sold anything with around 25% or more exposure to Europe, and I’m starting to get the jits on China.
I’ve still got some companies on my buy list. Most of those are co’s that do most of their business in the US. Meanwhile, I’m keeping my sideline money in some Vanguard utility and bond ETFs.
@jaymaster,
Thanks, we’re on the same page, and I am also approaching retirement, so an income focus makes sense to me. I also hold the Vanguard telecom etf (VOX) with a yield of 3.03%. I’m also heavily focused on US and minimizing my exposure to Europe for the time being. Big question is when will the long-term bond bull market be over? Felix Zulauf in Barron’s roundtable said that sometime this fall would probably be an opportune time to take profits on bonds. Good luck!
Interesting guys, I would caution that your position seems (to me at least) to be the most consensus positioning in the market right now. HQ Dividend Paying US equities are extremely popular.
There are if you really want yield you can find smaller cap companies with extremely strong balance sheets yielding 4-6% (Aberdeen International, IDT Corp etc).
Just because you recognise the name doesnt mean it’s low risk!
PS – give Europe some love, it’s priced for disaster! Perhaps rightly so….