Last week I was observing the change in the Citigroup Economic Surprise Index and noticed that it was sitting at -32 from 58 in mid-March. The US Treasury Market pays attention to the CESI because it indicates when economists have been optimistic or pessimistic in their forecast for economic data. It also shows the length of time results of data have been better or worse than expectations.

From Bloomberg:

The Citigroup Economic Surprise Indices are objective and quantitative measures of economic news. They are defined as weighted historical standard deviations of data surprises (actual releases vs Bloomberg survey median). A positive reading of the Economic Surprise Index suggests that economic releases have on balance [been] beating consensus. The indices are calculated daily in a rolling three-month window. The weights of economic indicators are derived from relative high-frequency spot FX impacts of 1 standard deviation data surprises. The indices also employ a time decay function to replicate the limited memory of markets.

The reason the CESI is so useful for the US10Y is because a falling CESI tends to be bearish for the US10Y yield and we all know what that means for the Yen. Something I have been a bit stumped on is the soft data we have seen recently and the lack of concern from the FOMC. Their only comments have been that recent softness is transitory and that a pickup is expected in Q2. Normally Yellen is quite dovish and has consistently communicated when she feels data is positive and a rate hike is appropriate or when data is not in line with expectations and that waiting for further evidence makes sense. With the next meeting less than a month away, we have heard very little from her and I was not expecting Bullard (hawk, nonvoter) to be the one to address the elephant in the room, which he did in his speech last week. So either he’s the only one on the clue train or the FOMC are experiencing difficulty forecasting actual outcomes and truly believe we are going to see evidence that economic data between now and the June meeting supports a further increase in the Fed funds rate.

As I am sure you know, we have the release of FOMC meeting minutes on Wednesday followed by GDP and PCE on Friday. The minutes are going to mention that future hikes are data dependent and that attention should be paid to Friday’s release with the forecast showing that a positive result is expected as per the meeting minutes from March and the statement from 3 May. If data has failed to meet expectations for the past six weeks then what makes this week any different? And if GDP and PCE are below expectation does that mean the FOMC are going to hike anyway? Soft data would see a move lower in US10Y yields and that would bring down the chance of a rate hike as measured by the Fed Watch Tool – which is currently indicating a 78.5% chance of a rate hike in June though based on what? Price action on the US10Y certainly does not indicate that Yields are bullish.

Here’s a summary of his speech on the 19 May, as per the St Louis Fed website:

St. Louis Fed President James Bullard said in St. Louis that U.S. macroeconomic data have been relatively weak, on balance, since the Federal Open Market Committee (FOMC) met in March and raised the fed funds rate. Economic growth is unlikely “to move meaningfully” this year from the current trend of about 2 percent. Inflation and inflation expectations “have surprised to the downside.” He noted that financial market readings since the March decision have been opposite of expectations. “This may suggest that the FOMC’s contemplated policy rate path is overly aggressive relative to actual incoming data,” Bullard said. He also discussed the relationship between unemployment and inflation and said that, even if U.S. unemployment declines substantially further, the effects on inflation are likely to be small.

So we have yields moving lower on the US10Y, a CESI which has been down for six weeks and a FOMC hawk that feels the FOMC might be moving too aggressively? That’s a lot of coincidence.

If all of this adds up to no hike in June then that is going to result in a further move higher in the price of the US10Y, a further move lower in equities and a further move to safety. Yen strength, Gold strength and Chf strength – which would be a continuation of the move that started last week.

Now if we take this one step further and include the current risk event surrounding the investigation into Trump’s ties with Russia during the election last year, the sudden firing of FBI director Comey and Comey’s testimony next week in front of the Senate Investigation Committee, this could be quite a trade – especially if that testimony does not go well for Trump and if the worst happens and Trump is impeached that would certainly bring a lot of volatility into the market and see a proper reversal of the reflation trade. This, of course, is all speculation with no data or facts to back up a positive or negative outcome though both are certainly possible and it is very difficult to tell what the outcome is going to be. Markets don’t like uncertainty and it is more likely traders would take profit and get out of the market than get in. Especially if the only reason they are in is because of a rate hike in June and upcoming data does not pickup like the FOMC think it will.

Based on the above I am looking for opportunities to continue last weeks’ move and will be looking for opportunities to trade risk off market conditions by buying Yen, Gold and Chf. If I don’t get the setups then I won’t take the trades and it will be

Please feel free to provide feedback in the comments section below. I am keen to hear what others think.


US10Y H4





Gold H4

4 thoughts on “James Bullard, the Citigroup Economic Surprise Index and the US10Y are saying the same thing”

  1. richard trusler says:

    thankyou , for this , very informative ,i will be watching closely ,

    1. Ryan Gandalf van Jaarsveld says:

      Yeah it’s very interesting indeed, looking forward to seeing how it plays out

  2. Peter Ward says:

    Good work, I was thinking the same thing recently about the soft data and the Fed’s likely hike. Seems interesting that there is still a 78% chance of June happening.

    1. Ryan Gandalf van Jaarsveld says:

      yeah it’s very interesting – not sure why the percentage is so high with recent data. It definitely looks like there is still quite a bit of pricing in that would need to be unwound if the Fed don’t raise in June. Though I think it’s also about what happens after June. We have seen quite a bit of USD weakness since Jan with almost all of the Trump Bump undone though there is still quite a bit of pricing in on the Yen that can be unwound. Last year the FOMC were pretty hawkish forecasting four rate hikes and were quickly corrected last Feb after the projection in December ’15. This year we had quite a move in the market after Trump and I wonder how much the yield on the US10Y was factored in when the Fed decided to raise at the March meeting. I am very interested to see what the minutes reveal tomorrow and then looking forward to seeing the GDP and PCE result on Friday with NFP next Friday. The better trade, of course, would be a move higher in the Yens leading up to the June meeting and then an unwind into Summar holidays though with data being what it is and price on the US10Y not being bearish at all, the market does not seem to be very convinced.

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