One of the criticisms leveled at the “Trump Trade” that has propelled stocks, commodities, the US dollar and bond yields higher since early November last year is that it’s been driven by improved sentiment, rather than hard economic data.
“Soft data”, as it is known, has improved dramatically. Business and consumer sentiment are at levels not seen in many years, as are other measures such as manufacturing and services PMI reports.
However, the hard data — what’s actually happening on the ground — is yet to see an improvement, at least in some analysts’ minds.
That’s made more than a few people nervous that the rally is being driven by hope, rather than fundamentals, raising the prospect that the risk rally since Donald Trump won the US presidential election could unravel just as quickly.
While some think that’s the case, Tom Porcelli, chief US economist at RBC Capital Markets, thinks the idea that the hard data hasn’t been improving is far from the truth, pointing to the chart below that shows how US soft and hard economic data has been tracking recently compared to historic norms.
Although the blue line — measuring soft economic data — has scooted higher since the US election held on November 8, there’s also been a noticeable pick-up in the hard economic data, shown in yellow.
“As we’ve highlighted, economic fundamentals are not just sound here in 2017 but they continue to improve — a theme we have been driving home since the beginning of the year,” says Porcelli. “And for those that argue the improvement is solely in the ‘soft data’, the facts simply do not support that narrative.”
Porcelli says that while there is no question sentiment data have performed well in absolute terms, the hard data is also catching up, consistent with the idea that what is being seen in the ground almost always takes time to be captured in official data.
That’s not an unreasonable assessment, particularly as many hard data releases are often released months after the actual activity has occurred.
Given the improvement in hard data now appears to be playing catch-up to those in the soft data, and with several Federal Reserve officials becoming increasingly hawkish in their language towards the outlook for interest rates, Porcelli says that the prospect of four rate hikes this year, not just two or three, is an idea that “seems to be gaining traction”.
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