CESIUSD is the Citi Economic Surprise Index which measures data surprises relative to market expectations.
Vice-Chairman Dudley yesterday:
"Data releases that are close to our expectations have little additional impact on the forecast, while data releases that deviate significantly from our expectations can lead to more significant revisions of the forecast," Dudley said Thursday in remarks prepared for a media briefing in New York. "It is, therefore, important for market participants and households to be able to follow the data along with the FOMC and to understand how we are likely to interpret and react to incoming data."
Ok so actually CESIUSD Index is perfect measurement of Fed from here out…. The problem?
CESIUSD – the Surprise Index is almost perfectly mean-reverting around ZERO. This is an issue because right now… it's at a low.. meaning even without doing great the US economy have very chance of improving relative to expectations……!!!!! I.e.: Not to true picture of overall economy but vis-à-vis present situation…..
Bloomberg have similar index….. ECSURPUS – not very different…
The "positive" being Atlanta Fed GDPnow forecast which have increased..but often comes down hard as quarter grows old…(Look at March drop for Q1)
Finally, Fed NY nowcast is less "impressive so far.."
Conclusion
I still think Fed is about to do a "massive mistake" taking mean-reverting improving data as a precursor for NET CHANGE in overall momentum – while what is "really happening" is that the US economy is improving from recession bound growth (and productivity) to less than escape velocity…..
I firmly believe Fed's hawkish tilt will be almost as short as the July/August 2015 announced hike in September 2015…….
Fading the FED is still overall the game, but as above indicates there is risk that FED will be desperate to continue "normalization"…..making June a likely date for July hike….
Trading
We went neutral on US$ and hence also emerging markets and commodities early this week, I doubt Fed despite the above will be able to remain this hawkish… I still see as earlier communicated that labor market conditions is about to turn weaker… and soon….. plus if hawkish stance remains market will quickly be down 10-15% which again will have the "dovish message" in focus….
The EURUSD – as proxy here for USD have major support at 1.11000 ish which is also 200 SMA…… a break will be bad for risk and mean much stronger US dollar… Observe G7- Finance meeting this weekend where market is looking for fiscal expansion talks (probably followed by Japan next week doing both fiscal push plus more QE)….. ie. further upside risk in USDJPY….
USDJPY… up against "cloud" here… breaking "into it". Will lead to top of cloud - break above cloud means trend change..
Levels: 110.40/50 – 112.00 (old high)… above 113.80 major TREND change…
I remain with same allocation….
OW FI 30 YR US
UW EQ – SPX & banks
OW Commodities (mainly Gold)
Neutral FX overlay and short EM currencies as hedge vs. commodities.
Stopped in WTI crude short.
Safe travels and Week-end
Med venlig hilsen | Best regards
Steen Jakobsen | Chief Investment Officer
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