Markets
Hammock
The Citi economic surprise index tends to look like this. (Getty Images)
Summer blues

Surprise! This is the gloomiest you’re likely to be about the economy this year

Look out for the “hammock pattern.”

Luke Kawa

Statistically speaking, now — the start of summer — is the winter of our economic discontent.

The Citi US economic surprise index measures how much data released over the past three months has exceeded or fallen short of economists’ expectations. From 2011 through 2019, this index displayed some interesting seasonal tendencies. On average, this series usually starts off well before fading strongly into mid year, bottoms on June 28th, and then rises into year-end.

About a decade ago, The Globe and Mail’s Scott Barlow, a veteran mutual fund analyst and journalist, dubbed this “the hammock pattern” for, well, obvious reasons.

A trend of early-year over-optimism has also been present in key market and economic variables. From 2011 through 2019, earnings per share estimates for S&P 500 companies as well as the expected rate of US GDP growth for a given calendar year have tended to be revised lower as time passed.

Economic surprise indexes are a little different in that they typically mean-revert back towards zero. The logic underpinning this: If analysts make consistent forecasting errors in the same direction, enough one-way failures spur a re-calibration and over-correction in the opposite direction.

If there’s a fundamental cause behind the twists and turns of this particular pattern, it may rest in gas prices, which are usually inversely correlated with economic surprise indexes and also often top in the summer months (the peak driving season).

The pandemic disrupted economic activity significantly — causing abrupt changes in the economy linked to the timing of shutdowns, stimulus, and re-opening that spurred outlier moves in prices, spending, and employment that didn’t really conform to seasonal norms.  In addition, the rate of nominal growth (real activity plus inflation) has been much higher and more volatile over the past four years. As such, the hammock pattern hasn’t been as seemingly reliable as it was pre-pandemic. 

But so far this year, the index is displaying some of its old seasonal behavior. Well, at least the bad part. Recently, the US economic surprise index slumped to -29, its lowest level since mid-2022.

This perceived loss of growth momentum has been accompanied by an actual moderation in activity. Separately, there’s been softness in Citi’s US economic data change index, which tracks how well or poorly the data are relative to their one-year average, and has declined to its lowest level of the year.

Some stabilization or improvement in either investors’ perception of the economic data – or the data itself – may be needed to shift the dominant meta in the stock market, which in 2024 has been defined by the outperformance of megacaps (especially in the tech space, and Nvidia in particular) relative to the many other stocks that comprise the S&P 500.

22V Research chief market strategist and founder Dennis DeBusschere is calling for stock-market strength in some of the areas that have lagged behind, like banks, transportation (ex-airlines), energy, and real estate investment trusts.

He laid out the case for investors’ confidence in the durability of the US expansion to improve in the weeks ahead, making two points in a note to clients this week.

“First, the odds that both the US economic diffusion index and the Citi surprise index move significantly lower from here, are low (they have already registered sharp declines),” he wrote. “Second, some moderation in economic growth, which is happening now, will be taken as benign by investors (unless there are sharp downside surprises).”

More Markets

See all Markets
markets

Oracle jumps after Q3 results exceed expectations, boost to sales guidance

Oracle is up 5% in postmarket trading after its quarterly results and outlook gave investors reason to cheer.

The hyperscaler reported:

  • Sales of $17.2 billion (estimate: $16.9 billion).

  • Adjusted earnings per share of $1.79 (estimate: $1.70).

  • RPO (remaining performance obligations, or backlog) of $553 billion (estimate: $537.8 billion).

Oracle’s closely watched capex for the quarter was $18.64 billion, above analyst estimates of $14 billion.

Management also raised its sales outlook for the next fiscal year to $90 billion; analysts had expected $86.7 billion.

One year ago, management suggested that its fiscal 2027 top-line growth rate would be around 20%. And last quarter, the company said that 2027 sales would be $4 billion higher than previously expected. Putting this all together, this means Oracle’s previous 2027 sales guidance was in the neighborhood of $84.4 billion ahead of this report.

Breaking down Oracle’s cloud business:

  • Cloud revenue was $8.9 billion, up 44% year on year.

  • Cloud infrastructure revenue was $4.9 billion, up 84% year on year.

  • Cloud application revenue was $4 billion, up 13% year on year.

All of those figures were marginally ahead of estimates.

The cloud company’s elevated indebtedness and expected cash burn compare unfavorably to other hyperscalers, which caused markets to treat its aggressive capex plans as more risky than those of its peers. That’s been exacerbated by OpenAI, itself a cash incinerator, being the source of much of Oracle’s pipeline of future business.

Oracle’s five-year credit default swap spreads widened significantly from mid-September through late January due to this counterparty and credit risk. The company’s perceived creditworthiness recovered after announcing plans to raise money through equity, not just debt, to find its expansion plans, before CDS spreads once again blew out to their widest level since 2009.

“Oracle has been stained by the negative sentiment around OpenAI and is generally viewed as a poster child for AI Capex excess / madness and so a super squeezy rally in the stock could tell us AI Capex fears have peaked for now,” Brent Donnelly, president of Spectra Markets, wrote ahead of this release.

Oracle shares took a beating recently, as a number of analysts have lowered their price targets for the stock, which is down about 56% from its 52-week high of $345.72.

markets

Boeing faces Q1 delivery slowdown after discovering 737 Max wiring issues

Boeing shares dropped on Tuesday following the company’s announcement that it will delay some 737 Max deliveries this month after discovering scratches on wiring within the planes.

According to the plane maker, fixing the issues could take a matter of days for each plane. This could impact March and Q1 delivery figures, but Boeing doesn’t expect yearly totals to be affected.

Boeing is still producing an average of 42 737 Max planes per month, The Seattle Times reported. The FAA raised Boeing’s 737 production cap late last year.

Boeing delivered 51 commercial planes in February, its highest total for the month since 2018. The figure far exceeded the 35 deliveries for Airbus, the company’s European rival.

Boeing is still producing an average of 42 737 Max planes per month, The Seattle Times reported. The FAA raised Boeing’s 737 production cap late last year.

Boeing delivered 51 commercial planes in February, its highest total for the month since 2018. The figure far exceeded the 35 deliveries for Airbus, the company’s European rival.

Tehran’s Shahran oil depot burns after US and Israeli attacks. (Photo by Hassan Ghaedi/Anadolu via Getty Images)

What analysts say they’re looking for next in the oil markets

“It has the makings of a once-in-a-generation market dislocation.”

Latest Stories

Sherwood Media, LLC produces fresh and unique perspectives on topical financial news and is a fully owned subsidiary of Robinhood Markets, Inc., and any views expressed here do not necessarily reflect the views of any other Robinhood affiliate, including Robinhood Markets, Inc., Robinhood Financial LLC, Robinhood Securities, LLC, Robinhood Crypto, LLC, or Robinhood Money, LLC.