Street recession indicator says fears overblown

Published Thu, Mar 3 20166:00 AM ESTUpdated Thu, Mar 3 201610:20 AM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

Recession fears gripped the markets last month, just as one indicator was beginning to show those worries were overblown. The Citigroup U.S. Economic Surprise Index reached an eight-month low on the day of the last employment report Feb. 5. That was just six days away from Feb. 11, when the S & P 500 fell to its low of 1,810. The surprise index remains negative, but its move suggests the market has been too glum about the economy. The Citi index could also be sending another important message to markets. An improving economy could mean Fed rate hike assumptions will have to come forward as well. Futures markets are currently pricing expectations for a first full rate increase for March 2017. As the data have improved, the expectation for a December rate hike has been rising, and is now more than 60 percent. "If the improvement in data continues, while it would be welcome by all means and ultimately good for markets, expectations and pricing for rates will need to be pulled forward, and that could result in a return of some volatility," Bespoke co-founder Paul Hickey said in a note. Jim Paulsen, chief investment strategist at Wells Capital Management, said the improvement in data, like Tuesday's ISM manufacturing figures, has been reducing expectations for a recession. "In 30 days, the whole thing changed," said Paulsen. "It's (the index) now at the highest level since November." The index edged higher Wednesday with ADP's payroll report, which showed 214,000 jobs, more than the 190,000 expected. It also got a lift when ISM manufacturing was reported at 49.5, a full point higher than expected. It also rose on Friday's fourth-quarter GDP and personal income and spending. "The surprise index is a little surprising given that economists' forecasts have not been extremely bearish and low," said Steven Wieting, global chief investment strategist at Citi Private Bank. He said the ISM and other data show the U.S. had a temporary overbuild of inventories. "I think we really had an inventory problem. The problem of exports is really one of inventories. In the absence of larger global shocks, the U.S. will be able to work through its inventory problem and grow," he said. Wieting said the improvements in the economy could certainly get the Fed moving, but probably not at its March meeting given recent market turmoil. Bespoke took a look at U.S. surprises versus Citigroup's European surprise index, and that tells an interesting story of contrasts. In just the last couple of weeks, the U.S. index has moved up on positive surprises, while European data have been worse than expected and the U.S. exceeds Europe for the first time since January 2015. "For Europe, this likely means additional stimulus at next Thursday's ECB meeting," wrote Hickey. The European Central Bank is expected to announce more easing measures at its meeting next week.

NYSE trader on the floor

Andrew Renneisen | Getty Images

Recession fears gripped the markets last month, just as one indicator was beginning to show those worries were overblown.

The Citigroup U.S. Economic Surprise Index reached an eight-month low on the day of the last employment report Feb. 5. That was just six days away from Feb. 11, when the fell to its low of 1,810.

The surprise index remains negative, but its move suggests the market has been too glum about the economy. The Citi index could also be sending another important message to markets.