So-called ‘soft’ data, such as strong sentiment indicators and survey levels for the US economy, have raised the debate whether the real economic indicators ahead – the so-called ‘hard’ data – will be able to fulfil the expectations created, or whether they will instead disappoint and lead to market unrest. As pointed by Janwillem Acket Chief Economist at Julius Baer such a debate is a regular phenomenon following a series of strong sentiment data releases.
We believe that our current reflation scenario for the US economy, with 2.5% real gross domestic product (GDP) growth in 2017 after 1.6% in 2016, is on a sound footing. Remember, US growth in Q4 2016 stood already at 2.1%. However, we take account of the fact that, historically, during the early phases of a Republican US presidency, business and sentiment indicators tend to display some euphoria. We also know that this euphoria will decrease as time goes by.
Nevertheless, Julius Baer’s analysts remain convinced that hard US economic data, from both production and demand sides, will confirm in the months ahead much of the optimism seen lately in surveys, albeit at more realistic levels than the latter suggest. The major leading indicators that they consult, such as the US purchasing managers’ survey data, tend to exaggerate the highs and lows but provide strong signals for upward and downward trends.
Currently, we continue to receive strong upward signals. Nevertheless, market participants should brace themselves for short-term volatility, should positive but realistic hard data releases not match euphoric expectations. The high levels of the positive economic surprise index for the US could rapidly drop, as with a generally brightening economic backdrop expectations tend to rise and become prone to sobering and sometimes even overdone reactions of disappointment – a typical pattern of financial market behaviour.
There is ample reason to stay calm and not to get overly excited at this juncture.