If you’re wondering how the US economy is likely to fare as we approach year-end, this interesting chart from Westpac may have the answer.
It looks at US economic data surprises, looking at the average median deviation from the calendar year average from 1997 to 2014.
There’s definitely a pattern, with data tending to surprise to the downside in the first half of the year before rebounding as year-end approaches.
A similar pattern already playing out this year with data starting to surprise to the upside, rebounding from the levels seen just a few months ago.
As Richard Franulovich, chief currency strategist at Westpac points out, this has often led to a lift in US treasury yields in the final quarter of most years, even outside periods when the US Federal Reserve has lifted interest rates.
“The US 10-year yield has risen about 30 basis points (bp) on average in Q4 in the post-crisis era,” he says.
“The timing of Fed hikes will have something to do with that, the Fed’s first two hikes in this cycle occurring in December of 2015 and 2016. But the phenomena goes back much further too, with US yields having risen in Q4 in 17 of the past 25 years.”
Franulovich says trend in US data surprises into year-end is arguably a key contributor to higher yields, noting that “Q4 tends to consistently produce a disproportionate share of positive surprises while Q1 tends to see more downbeat data”.
The relationship between data surprises and US 10-year note yields are shown in the two charts below.
The lift in yields may also explain why the US dollar has a good track record in the final quarter of the year, rising in eight of the past 12 years. It’s also up 1.9% so far this year, suggesting that it may improve that record to nine from 13.
However, while data surprises tend to boost the US dollar and yields at this time of year, as Franulovich notes, it has the ability to wrong-foot investors who are positioning for a sustained economic acceleration.
“The risk is that what may appear to be a strong flicker of sustained reflation taking hold at the moment could be attributable to ‘seasonal trends’, and thus temporary,” he says.
While it may be tempting to put on a contrarian trade looking for lower US yields and dollar, he says that it is a “quarter-long phenomena, so it is too soon to fade”.
Perhaps something to revisit in the final throngs of this year or in early 2018.
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