The Bloomberg US macro surprise index (see above) measures the difference between how data actually is coming out and consensus estimates for that data. The 50 day moving average reached a record high in mid February indicating not only was the data coming out significantly better than expected, but it remained at that extreme for a record duration.
This goes back to a point we have made many times, particularly in relation to the US economy. The data continues to suggest a much more robust economy than market participants have hitherto appreciated. Friday’s employment report was the clearest indication of this strength, yet the debt deflationists have continued to dismiss the data. The one thing they have been hanging their deflationist hats on is the personal consumer expenditure (PCE) data, which has anomalously provided a much more sluggish picture, despite all of the other data pointing to the contrary. This could well be because the PCE tends to be wrong at key economic inflection points (see July 2008 where the PCE data was pointing to ongoing US economic expansion at a time when the data later showed the US economy to be falling off a cliff).
And now there are signs that the PCE initially failed to capture the turn again. Yesterday, we got the February retail sales data with revisions to prior months. Overall retail sales in February were up a strong 1.1% as expected. Core retail sales rose 0.5%. Of greater significance, there was a .5% upward revision to January and December core retail sales.
These revisions are significant. Suddenly core retail sales, which had been tracking into Q1 at a 2.8% annualized rate, may now be tracking into Q1 at perhaps a 6% rate. Economists will be revising up their projections for Q1 PCE growth and therefore Q1 GDP growth.
And today bonds appear to be taking it on the chin, the 10 and 30 year US treasuries having taken it on the chin the past few days in spite of the Fed’s surprisingly benign statements regarding their intentions on interest rate policy in which they indicated that interest rates would remain “exceptionally low” until “the END of 2014″. Is the bond market getting a whiff of inflation?
The other long term bastion of deflation – Japan - is also worth examining. Over the last six weeks, we have seen the second largest devaluation in the JPY since the mid-1990s. Adding fuel to the fire, yesterday Japan announced its intention to purchase 65 billion Yuan of Chinese government debt. This appears to be part of the general move of the current government to exit deflation via weakening the yen, as discussed on these pages before. Look for Japan to be increasing total forex reserves, and in multiple currencies.
The euro is also weakening again, as are other European currencies. Yesterday, the Norwegian central bank cut its benchmark interest rate for a second consecutive meeting as policy makers cited the threat of krone appreciation to be a serious to growth. They are seeking a devaluation, even at the risk of a creation of a new housing bubble.
The era of competitive currency devaluations appears to be upon us. It’s a perfect environment for gold, which remains anomalously weak. But not for much longer is our guess.