If you’re expecting upcoming US economic data to shoot the lights out, helping to propel bond yields and the US dollar higher, this chart may provide some food for thought.
From Bank of America Merrill Lynch (BAML), it shows the percentage of US economic data releases that either beat or miss economist forecasts going back to 2002.
There’s a clear pattern, as Hans Mikkelsen, High Grade Credit Strategist at BAML, points out.
“In 12 of the last 15 years we have seek peak upward surprises to economic data around the turn of the year, only to see sharp subsequent reversals toward downward surprises,” he says.
“Only during the financial crisis (2008 and 2009) and the near-recession around the turn of 2015/2016 does this approximate pattern not hold.”
So US economic data tends to beat forecasts on most occasions around this time of the year, creating optimism among economists. That in turn lifts expectations so high that the data almost inevitably undershoots, leaving economists feeling glum about the state of the economy. That leads to expectations being lowered so far that the data almost inevitably tends to beat in the second half of each year, again helping to bolster confidence.
As Mikkelsen notes, “such seasonality is truly remarkable and unlike anything we have seen before”.
With optimism over the US economic outlook elevated again following the introduction of tax cuts from the Trump Administration, it’s easy to see a scenario where the bar for upcoming economic data is set to high that it will lead to a large number of data misses.
“[The] disappointing US jobs report for December serves a warning that the many recent upward surprises to US economic data — that have contributed to the rally in risk assets — tend to reverse in the new year,” says Mikkelsen.
If history does repeat, it’s also easy to see that it may weigh on the US dollar and bond yields as it has done so in the past.