No Use Being Sentimental – Ignoring Economic Surprise Indices

Global sentiments are not hot.

The Citi US Economic Surprise Index (CESIUSD) is at an 18 month low notwithstanding the S&P 500 and bond yields.

Given the way markets are reacting, we would expect better out of Europe which is currently the best of the lot with the Citi EUR Economic Surprise Index (CESIEUR) in positive territory, as compared with negative indexation numbers from the US, Japan and China.

CESIUSD CESIUSD CESIJPY CESICNY

The CESI indices are basically a measure of data surprises relative to market expectations which means that this time round, we are seeing alot of disappointments.

Yet to me, a negative number usually means that expectations would be lowered and positive surprises will ensue. Its just that China’s number got worse this time round, as did America. With both China and US hovering at their lows, Japan barely clinging to zero and Europe no where near its high, it is the market outlook that is keeping hopes up. Economists and the World Bank are all keeping their spirits up for a recovery in US and Europe, on which the rest of the world hinge upon.

CESIUSD EUR SPX DXY

From the graph above, it looks like the EUR and the USD Index have both reacted to the CESIUSD whilst the S&P has continues to defy gravity.

Fortunately, nobody really pays that much attention to the CESI for it is nothing more than a sentiment gauge of secondary importance, and does little to reflect long term economic reality. But it is still a significant signal that economic data is disappointing.

A question we can ask ourselves is, if the sentiments are negative and markets choose to ignore the hard facts of the present, trading ahead based on hopes for the future just means, 1. negative economic numbers give rise to positive sentiments or 2. the majority are going against their better judgment.