½ Full: Seeing Through a Weak Q1

Key Points

  • Economic surprises have faltered to the neutral level
  • Hard data has been stubbornly weak relative to soft data
  • But leading indicators are not flashing any meaningful warning about growth

As I've often noted when it comes to the relationship between economic data and the stock market, "better or worse tends to matter more than good or bad." In other words, stocks tend to key off rate of change more than level when it comes to economic indicators. That is why the Citi Economic Surprise Index (CESI) is not only so widely followed, it's highly correlated to the stock market's performance.


As seen below, the CESI—in this case for the United States—measures how economic data is coming in relative to expectations. After a notable surge from mid-October 2016 to the recent high, the index has fallen back toward the zero marker. This perhaps explains more than anything the choppier action by U.S. stocks in March and April. As grim as this may appear, it is more likely a normal reversion to the mean, as readings as high as seen recently don't tend to be sustainable—especially when the expectations bar gets high, as had been the case.

US Citigroup Economic Surprise index

Source: FactSet, as of April 21, 2017.

Soft hard data

Part of the reason the expectations bar got elevated was due to the parabolic surge in so-called "soft" data (survey/confidence-based); about which I've written in detail recently. The chart below looks as the relationship between soft and hard economic surprises. Clearly, the hard data continues to be disappointing relative to the soft data, although even the soft data retreated a touch recently.

Bloomberg Surprise Indices

Source: Bloomberg, as of April 21, 2017. Soft data: business and consumer surveys. Hard data: housing, industrial, labor, household and retail data.