If you’ve been following markets for a while you know that traders don’t just care about whether the data is good or bad. What really moves the market is whether it’s better or worse than expected.
That’s where the Citigroup Economic Surprise Index (CESI) comes in.
What is the Citi Surprise Index?
This index tracks how actual economic data releases compares to the forecasted data.
A positive reading and a climbing index shows that the data is beating expectations. In this condition traders may consider the economy is getting stronger, which could lead to adjustments in central bank policy.
On the other hand, a negative trend shows that the data is disappointing vs the forecasts. Again in these conditions traders may consider the economy is becoming fragile, which could lead to an easing of central bank policy.
Think of this as a sentiment tool.
I made my own version of this that you may be familiar with here:
This one isn’t as pretty or as visual as citi’s but this is of the same vein. I wanted to understand if it can create a strength meter and here it is in its simplest form.
What does the index say about the US right now?
Since the end of July the index highlights that data has been beating forecasts pushing the index into a positive territory.
Despite the US labor market problems, other data points have been upbeat which is why the index is rising.
Here I have overlaid the Citi surprise index on top of the USD index, so you can see how this can work.
At the beginning of the year the data was disappointing, the USD followed. Recently the Citi index has been tracking higher however the USD index has remained range bound. Which is interesting.
For me I think if the US labor market data begins to shift to become more positive, it could be a catalyst for USD shorts to unwind.
However, I like to use this as a sentiment indicator so it’s always used in the confluence with other factors.
Should you care?
Of course you should. As retail traders we should be looking at the fundamentals, the data points and the trajectory of these. To me this current move higher could be an early signal for a potential reversal in the USD, especially as this USD short position is becoming overcrowded.