Article / 20 May 2016 at 10:00 GMT

Macro Digest: Is the Fed about to make 'a massive mistake'?

Chief Economist & CIO / Saxo Bank
  • Surprise indices can give good insights, but have to be looked at with caution 
  • Be aware of the mean-revertion around zero
  • Atlanta Fed GDP forecast has increased, which is positive
  • I still think the Fed is about to make a massive mistake 
  • I doubt that the Fed will be able to remain this hawkish


That august body might be about to make a "massive mistake". Photo: iStock

By Steen Jakobsen

Surprises are expectations which are not met. CESIUSD is the Citi Economic Surprise Index which measures data surprises relative to market expectations.

According to Bloomberg, FOMC vice-Chairman William Dudley said Thursday:

“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,” adding that "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 a perfect measurement of Federal Reserve 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 has a very good chance of improving relative to expectations……!!!!! I.e.: Not to true picture of overall economy but vis-à-vis present situation…..

Source: Bloomberg

Bloomberg has its own similar index, the ECSURPUS – it does not look very different.
Source: Bloomberg   

The “positive” being Atlanta Fed GDPNow forecast which has increased. But it often comes down hard as a quarter grows old (look at March drop for Q1).

Atlanta Fed GDPnow
Source: Bloomberg 
Finally, Fed NYnow cast is less “impressive so far..” 
Fed NY nowcast

I still think the Fed is about to make 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 the 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 a risk that the Fed will be desperate to continue normalization, making June a likely date for a July hike.


We went neutral on USD and hence also emerging markets and commodities early this week, I doubt that the Fed despite the above will be able to remain this hawkish. As earlier communicated, I still see that labour market conditions are about to turn weaker and they are to do so soon, plus if the hawkish stance remains, the market will quickly be down 10-15% which again will have the “dovish message” in focus.

The EURUSD – as proxy here for USD has major support at 1.11000-ish which is also the 200-SMA. A break will be bad for risk and mean a much stronger USD.

Observe the G7 Finance meeting this weekend where the market is looking for fiscal expansion talks (probably followed by Japan next week doing both fiscal push plus more QE) i.e. further upside risk in USDJPY.

Source: Bloomberg

USDJPY in the clouds

We’re up against the “cloud” here, and appear to be breaking into it and that will lead to the top of this cloud. A break above the cloud signals a trend change here.

Levels: 110.40/50–112.00 (old high); a break above 113.80 signals a major trend change.

Beyond dollar/yen, I am retaining the same allocation:

• Overweight fixed income (30-year US Treasuries)
• Underweight equities (S&P 500 and banks)
• Overweight Commodities (mainly dold)
• Neutral FX overlay and short emerging market currencies as a hedge versus commodities.
• Stopped out in my WTI crude short

Safe travels and weekend.

— Edited by Clemens Bomsdorf

Steen Jakobsen is chief economist and CIO at Saxo Bank


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