Allan von Mehren
Danske Bank A/S
As data has continued to beat expectations globally the so-called economic surprise indices have reached very high levels (chart 1). This reflects the good economic news supporting the case for strong synchronised growth momentum going into 2017 as we highlighted in Five Macro Themes for 2017, 1 December 2016. However, the high level of surprise indices is also a slight warning for markets, as history suggests that it is hard to sustain these levels for long. This is because expectations are typically moved higher after a period of good news and at the same time data moves in cycles and a string of strong data is often followed by some moderation. High expectations and softer data can quickly lead to disappointments.
This is important because the reflation theme partly hinges on continued positive surprises and markets have already come some way in pricing in reflation. With steep yield curves in the bond market, investors may find more comfort in buying long-dated bonds again if the data starts to moderate, or take profit on short positions which also leads to higher demand for bonds. It is also interesting that US bond yields have actually fallen lately despite continued positive surprises. It may be another sign that the bond sell-off is stabilising for now. Our medium- to long-term view is still one of higher bond yields by the end of 2017. But we could be in for a period of consolidation before the next leg up in yields.
Stock markets have also lost some upward momentum lately. A lot of investors have moved to overweight of equities versus bonds on the back of a positive news flow. Hence the flow into equities may be ebbing a bit. If surprise indices peak soon it could provide some short term headwind. Be aware, though, that historically equities have outperformed when the business cycle is in expansion territory. Hence our medium-term view is still positive on the stock market. Donald Trump is also seen as a positive factor for stocks in the longer term as he begins to execute on his plans of reducing taxes and rebuilding US infrastructure.
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