The Citi Economic Surprise Index for the US was probably the chart that was being sent around the most in recent days and I have seen all sorts of conclusions up to the point of worried people and hence I felt I wanted to give my 2 Cents to the current reading.
I have used the Surprise Index a lot over the years and in a normal cycle, it is a fantastic tool… BUT we live in unprecedented times, with challenges never seen before (at least in peace times)….. and that is where I feel the Index stopped working to the tune that it does give us the real reflection of what is truly going on.
In any past cycle, I would be truly very worried about where the Economy is heading BUT NOT this time.. I have ignored this index for most of 2021 and I will continue to ignore it for the rest of 2021 and maybe even parts of 2022…… WHY you may ask….??
The reason being… with the bottle necks and supply chain issues, we see that a lot of the recent data weakness as 2 root causes… 1.) is definitely the supply chain issues… so the projected growth for 2021 has been shifted into 2022… meaning some of the data look as if they have turned but really what has happened is we have taken some growth away and shifted it into next year( in the hope that those supply chain issues and bottle necks will get solved at some point)… Guess the news of partial closure of the Chinese ports doesnt help the confidence that those supply issues are going to be over anytime soon… no 2) would be that Inflation does start to bite to the tune that some consumer behaviour is changing BUT all in all, if we look into all the details of the US economy… it is A LOT stronger than this Citi Index would show.
That brings me to the next topic… Taper…. Yes, we have FOMC minutes today and maybe we can look a bit more into the cards of the FED but what we should also remember… we had A LOT of FED speakers since the last meeting… with FED Vice Chair Clarida really letting the Taper genie out of the bottle and many FED speakers after that did really swing the same way…. last night, FED Kashkari, the non-voting “ueber” Dove even talked about Taper by end of the year, maybe early next year… so no matter where you stand on the debate… no matter what the FOMC minutes would show… TAPER is incoming and it is coming fast… so USD bears might have to start accepting that this is going to happen…. interesting also that i start to pick up some chatter via the US media, that there are some going as far as to say that Taper could end by mid 2022… faster than the market would expect now….
We have spoken a lot about the FED and policy and what they should and shouldn’t do and when. My argument to keep it simple has always been that the FED policy is set at an Emergency level of March 2020 and we no longer have an emergency and if the FED also starts to look at the composition of Unemployment vs open jobs and many other gimmicks that are different to 2008 (like Govt cheques etc..)… they will have also grown confident that the UE situation of 2020-2021 is NOT quite the same as in 2008… and that the trend is there for the improvement…… and it is time for the FED to buy Insurance.
It was maybe a great and right idea to come up with the “transitory” expression and in the beginning it made a lot of sense… BUT with continued backlog , continued bottle necks.. the time line of “transitory” has become too long and higher prices are starting to get passed on… Labour shortage in some areas has seen wages go up…and the new post Covid job market may also mean Employers have to start to care more for their staff and we see some that start to pay for education or child care etc… so costs only go one way… YES, the Covid related goods that pushed CPI higher is for sure transitory… BUT the peak of Inflation was probably higher than the FED anticipated, so even with Transitory… maybe we do NOT come back to 2% and the other issue might be… as Covid related prices do correct, we see other elements of the economy to start increasing in price and replace the Covid transitory element .
I do NOT have a crystal ball sadly BUT from a pure common sense point of view… Taper is needed… the FED has to buy insurance in the case of “what if CPI does NOT come back down?? And let’s be honest… do we really NEED 120 bio a month? No we do NOT.. financial conditions are as lose as it can be… so reducing QE by 20 bio by December or even earlier is hardly a real big deal in my eyes… and yes, i would agree, there is a chance that QE is done by mid 2022.
All in all…. I feel the US economy rocks, I do feel Taper is just around the corner… and the USD will soon be back to hopefully the old saying… “buy USD’s wear diamonds”
I also wanted to thank Lev Borodovsky from the Daily Shot to be able to use his chart.