Citigroup Economic Surprise Index

The Citigroup Economic Surprise Indexes are a clever concoction that measures the variations in the gap between the expectations and the real economic data. The input consists of the actual econometric data that moves foreign exchange markets – the bigger the data moves forex markets, the more significant its weight in the index. And the consensus among economists before the data is released.

When the CESI is positive it means that the released data have been better than the expectations. In other words, economists have not ratcheted up their optimism enough to match the data coming in. When CESI is negative, it means that actual results have been worse than expectations.

Just a few months ago in March, when most were worrying about a coming weakness (or a double-dip recession) the surprises were very positive. Back then, the average economist, unlike the sentiment surveys, was quite pessimistic. At least relative to the actual results.

Now, we’re seeing the opposite happen with CESI dropping to negative levels not seen since the bear market lows:

In the above chart you can compare the Citigroup Economic Surprise Index for global data and the Citigroup Economic Surprise Index for the US. By far, the US CESI is showing a deeper decline. The European CESI (not shown) is actually still quite a ways from a similar extreme low suggesting that their markets have not yet seen a washout of selling.

As a reader pointed out last week, this indicator is now suggesting that we are at an important inflection point. However, because troughs correspond well to stock market lows, this indicator is not interpreted through a contrarian lense.

That is to say, when economists are too ‘pessimistic’, markets top and when they are ‘optimistic’ markets bottom. The linked to article incorrectly states that “economists are now overly pessimistic”. If this were the case, we’d be seeing positive CESI (as real data would exceed their low expectations). In fact, we’re seeing the opposite: economists that are so ‘optimistic’ that the actual results have been worse than their average consensus.

The important take away point here is when economic data is absolutely horrendous – as it is getting to be now – important lows are close at hand. When everything is sunshine and lollipops, you better run and find a good bombshelter!

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