Daily Commentary: The macro surprise index is mean-reverting
I have only brief comments on one thing today. Barclays Capital has a US Macro Data Surprise Index and it was at all time highs in February. Andy Lees of AML Macro Limited noted in his morning note that it hit that high but has since dipped. He also noted that the 50-day moving average for the index hit an all time high in February as well. I think this is significant for a number of reasons.
First, let’s talk first derivative and second derivative here for a second. We should assume that the surprise index’s hitting highs in February means that the data coming in at that time was the best relative to expectations and so the macro numbers like GDP and corporate earnings should also likely be the best relative to expectations on the back of this. This means that the numbers now coming out are less robust relative to expectations and so the only questions should be whether this trend continues and what impact it has on economic growth, earnings and asset prices. My sense is that we are seeing a reversion to the mean in this index and in corporate earnings. Silver and gold members see my post "2012 an inflection point toward S&P500 margin compression" from a month ago. If I am right, then we will start getting more negative surprises and that will translate into less asset price appreciation over the medium term.
Moreover, if this index has any significance, it would also translate into lower GDP growth in the second half of 2012. I am already expecting this due to the dip in monetary aggregates and the lag in Dow Transports (gold-level post). The question then is whether the recovery in credit and employment growth is enough to spur capital spending by businesses and then even more hiring. If not, then this market will see a correction by the end of Q2 which will bring stocks down at least 10%.
This index bears watching.
That’s it. Here are the links.
P.S. – watch price inflation in Brazil, India and China as well as wage inflation in China because we need these countries to grow to power continued economic recovery.
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