Pro Perspectives 6/29/20

June 29, 2020

We have a short week this week, with the observance of Independence Day on Friday. 

But this should be a big week, where the data will take center stage.  Not the virus data, but the economic data.  

We'll get manufacturing activity and durable goods orders for the month of June.  We'll get some June inflation data.  And we'll get the June jobs report — all by Thursday morning

This will give us two full months of data since the reopening of business started in Georgia.  

With this in mind, I want copy in an excerpt from my May 1 Pro Perspectives note, shortly after Georgia re-opened, and let’s look at how the economic data is playing out:

"Just as we evaluate the probable outcomes for markets, based on the way sentiment is leaning, we can also evaluate probably outcomes for the economy. 

And after being in the business of markets for 24 years, I can tell you that the best trading opportunities are found in situations where sentiment is heavily leaning in one direction or another – and/or when the expectations bar has been set at an extreme level (either overly optimistic, or overly pessimistic).  These are opportunities to bet against sentiment, because these situations set up for the element of surprise.  And with surprise we tend to see sentiment violent swing from extreme levels. 

I think we are set up for this swing in economic sentiment.  Public officials have set the bar very low on expectations of getting back to normal life.  And they've set the game plan accordingly for the re-opening of businesses – slow, and in stages.  And the broad belief is that the behavior of people will follow this very conservative path. 

This is set up for a surprise, related to how both businesses and consumers behave.  And I suspect we're going to get it. 

So, the market was set up for positive surprises in the data.  And we have indeed seen some big positive surprises.  You can see it clearly in the Citigroup economic surprise index below.

Now, with the big June data rolling in this week, we'll get to see how the economy looks with every state in some form of "open for business." 

I suspect we will continue to see the positive surprises roll in (related to jobs and demand), against a low expectations bar.  But with some key inflation data also in the mix, we may see the attitude begin to shift on the inflation outlook.