Economic Surprise Indices Turning Lower

Just a brief update on global Citi Economic Surprise indices courtesy of Societe Generale.  The general trend show a sharp weakening in European economic surprises which is the only index that has correlated well with equity market so far this year.  Given the importance of psychology in price movements, it’s worth noting the potential risk of a negative surprise environment in which investors have potentially priced in a bit too much optimism.

Here’s SocGen with more thoughts:

  • Turmoil in Cyprus is pushing the economic surprise index back into negative territory in the eurozone.
  • Momentum is still declining in emerging markets as growth is slowing.
  • Only the US is managing to maintain strong economic momentum and we expect economic surprises to remain positive over there, especially in H2 2013.



Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

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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  • Cowpoke

    Wonder what thier thought on US H2 would be if they read this from Sober look on Why has the US broad money supply flat-lined in 2013?

  • Steve W

    The Sober Look piece talks about money flowing out of money markets in to equities. Did I get that right? What I don’t understand is how that money disappears. Cash stuck in bank reserves is not in circulation, I get that (I think). On the other hand, if I take some of my cash (money market) and buy some stocks, didn’t the person selling me the stocks get that cash? Unless that cash is “destroyed” by taxes, it seems to me the cash stays in the system somewhere. Perhaps I’m missing a key point on this topic. Wouldn’t be the first time.

  • Cowpoke

    Steve’o I dunno. However, when I see this: declining cash in money market funds, it gives me great pause.

    Kinda A canary in the coal mine.

    But that’s just me.

  • Tom Brown

    I think I agree with you Steve. I don’t understand their reasoning either.

  • LVG

    Money never flows out of stocks and into cash. All cash issued is held by someone and flows THROUGH the system. So if you buy GE stock tomorrow you exchange cash for stock. The cash doesn’t get destroyed and taxes definitely don’t destroy the money. That’s MMT BS. Cullen hates MMT and started MR because they get the description wrong.

  • Jay

    I think it has more to do with rate of change than where the actual money goes. Of course the money is not destroyed, but prices can be bid up when you have a sudden spike in demand. I am just guessing here, but I think low levels of money market cash implies that there is not some sudden further surge that is going to rush into equities fom the money market arena and rapidly drive up prices (of course it could come from another source). I think the Sober Look article is focused on the affects of timing where cash flows into equities were slow in 4th quarter and exaggerated in 1st Qtr 2013. I don’t know that this gives us any real good indication of where stocks will go without knowing where the floor is on money market market funds, or the relative levels of cash in bonds are. My guess is that we are probably close to the lower bound of money market account balances at these levels of interest. That is to say that the people and dollars still in money market at these rates are likely to stay there for the most part.

  • Steve W

    Regarding taxes, if the money collected gets redistributed, then the money is not destroyed. But what if the government taxes too much and doesn’t redistribute (spend)the money sufficiently? Isn’t that one concern both the MR crowd and the MMT crowd have with the idiots in Congress who want to balance the budget (or even reduce deficit spending too soon)?

  • Cullen Roche

    Here’s how I explain this. We have a money system designed almost entirely around bank money or inside money. So, when someone takes money out of the inside money system and doesn’t put it back in it’s like a mini bank run of sorts. Banks don’t want you to do that because the money they issue is essential to the sustainability of the system. A govt surplus is like an ATM user who withdraws money and puts the money in a hole. Of course, that’s only destructive if the foreign position is a trade deficit because then you basically have income destruction on multiple fronts, but that’s a different matter. The point is, yes, MMT and MR agree on the idea that a budget surplus can be bad, but MMT will always promote a foreign deficit position because without it you can’t justify the permanent budget deficit position that MMT is designed around. MR would describe that a surplus is actually fine so long as the foreign surplus offsets it.

  • Steve W

    Thanks, Cullen. I need to get a better grasp of the foreign trade deficit/surplus part of this equation. Is this part of the “Sectoral Financial Balance” part of your (updated) abstract? When you say that MR would describe that a surplus is actually fine so long as the foreigh surplus offsets it, does that mean that the U.S. would be exporting goods and services at a higher level than imports?

  • Tom Brown

    I think he means a government surplus in revenue (taxes – gov expenditures) is fine as long as there’s an offsetting US foreign trade surplus.

  • LVG

    A current account deficit is an income drag for the country. It means more money flows out than in. A budget deficit means the government is also taking income from the private sector. So the only way for a budget surplus to be run in perpetuity is for the foreign sector to contribute more income than the government takes out.

    Singapore and a few other countries run this perpetual trade surplus position with a budget surplus. Seems to be working pretty great if you ask me. It’s all the current account deficit PLUS budget deficit countries who are in economic malaise.

  • LVG

    Sorry, should read:

    “A budget SURPLUS means the government is also taking income from the private sector”

  • Tom Brown

    LVG, you wrote:

    “A budget deficit means the government is also taking income from the private sector.”

    but I think you meant to write:

    “A budget surplus means the government is also taking income from the private sector.”

  • Steve W

    Thanks, Tom. You confirmed what I thought Cullen meant. I suppose that whole trade surplus/deficit topic opens up a can of worms in some respects. The MMT crowd seems fine with imports (trade deficits), right? Nows not the time to start a discussion about Milton Friedman, etc. Having said that, I’ll borrow some text from Investopedia:

    “When a nation has a trade surplus, it has control over the majority of its own currency. This causes a reduction of risk for another nation selling this currency, which causes a drop in its value. When the currency loses value, it makes it more expensive to purchase imports, causing an even a greater imbalance. Because a trade surplus usually creates a situation where the surplus only grows (due to the rise in the value of the nations currency making imports cheaper), there are many arguments against Milton Friedman’s belief that trade imbalances will correct themselves naturally.”

    What I’m trying to get a handle on is that part about “control over the majority of its own currency”.
    From an MR perspective, are we saying that if we’re running a foreign trade surplus, that means private sector is spending enough (and experiencing enough credit expansion)to keep the economy going without the need for federal deficit spending? Forget about Milton Friedman for now, I’m just wondering if I’m getting the gist of the sectoral financial balance equation, as it relates to federal deficit spending and trade surpluses/deficits. Thanks for everyone’s patience.

  • SS

    I am not certain about the dynamics of this, but I think that the basic gist of the argument is that a trade surplus generates income in the following way. When Caterpillar sells an earth mover to China they get paid in Yuan. Caterpillar then exchanges Yuan for $ at their bank. The bank will then go to the central bank who will exchange dollars for Yuan and the central bank can hold the Yuan and do what they please with them. This is basically central bank deficit spending since it results in an increase in the money supply in exchange for Yuan.

    If you run a trade deficit the opposite is happening. Money is flowing out of country and into someone else’s country.

    I think that’s right at least. Someone please correct me if I am wrong.