Easy financial conditions signal US surprise index surge - Westpac

Analysts at Westpac explain that the broad swathe of US data has generally broken to the weaker side of expectations lately, even allowing for some notably stronger releases such as the manufacturing ISM and non farm payrolls. 

Key quotes:

"At 43.5 our US data surprise index is at its lowest levels since early November 2016."

"But as weak as our US data surprise index is, it is not yet at rock bottom lows. As slide one shows our index remains above levels that are associated with low and fragile expectations (i.e. the preconditions for a bounce)."

"Any prospective turnaround, when it occurs, could produce a swift adjustment in US growth expectations. Slide two shows our US data pulse versus a simple US financial conditions index. Our data pulse is a close cousin to our data surprise index, tracking the overall directional momentum of the data rather than the number of data surprises. As slide two shows, financial conditions have a decent three month lead over our data pulse."

"Our US financial conditions index is at its highest levels since May 2014, signaling very generous financial market conditions, a point that more than one Fedspeaker has made in recent weeks. Allowing for a three month lag that points to a sharp recovery in the momentum of the US data."

"What’s the best way to trade any prospective shift in the momentum of the US data? Slide three compares our US data surprise index with the USD index and US 10 year yields. 10 year yields appear to be elevated relative to our data surprise index while the USD index continues to amble lower with our data surprise index. Long USD positions are thus more likely to reward amid any prospective shift in US data trends in coming weeks."