Steno Signals #36 – Why 50% of the current rebound is manufactured in a spreadsheet

We experience seasonal adjustments to an extent NEVER seen in time series history for CPI, Retail Sales and ISM numbers in January. Are we amidst a spreadsheet rebound or an actual economic rebound?

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Last weekend, we wrote about how bottoming global liquidity trends since November-2022 could explain the rebound in global equities and just eight hours later Citi followed up with a story on the exact same theme. This week has been FULL of global liquidity charts on social media and in research pieces from investment banks.

It is cool that we are able to form the agenda out of our little office here in Copenhagen. If you want to stay ahead of the narrative, look no further than Steno Signals 😊

Chart 1. Global liquidity vs. S&P 500 (liquidity has dwindled in February

Matt King and Citi had a slightly more downbeat take on the prospects for global liquidity and we admittedly find reasons to worry about trends in 2-3 months from now as well.

Both US and European fiscal authorities have ADDED liquidity via drawing down on general accounts since mid-2022, but the trend is running on fumes by now, which means that QT from the Fed and the ECB will “outpace” liquidity additions  from the respective Treasuries from May and onwards at the latest.

We expect another liquidity addition of around EUR 100bn and USD 350-400bn from the respective Treasuries before the trend is FULLY exhausted during the spring.

Chart 2. Liquidity addition from Treasuries has been a strong trend since mid-2022

Are we amidst a spreadsheet rebound or an actual economic rebound? A rant on seasonal adjustments

Allow me to bump up the nerd’o’meter for a second as I intend on ranting about seasonal adjustments and why economic data is currently extremely noisy consequently. This is of relevance to everyone with a macro-driven investment approach since we have seen some of the most bizarre seasonal adjustments in time-series history over the past couple of months.

So, can we even trust that we have seen a pick-up in activity or is this just a paper-rebound manufactured in the spreadsheets of the BLS and the Census bureau?

Let’s start with the part of the ULTRA-strong January data with the easiest seasonal adjustment to comprehend.

Chart 3: Record adjustments to ISM Services in January

It is fairly straight forward to calculate the ISM Services number in seasonal- and non-seasonal adjusted terms. You take the actual survey responses and divide the diffusion index by its seasonal factor.

As the seasonal factor was RECORD low for both the “business activity” and “new orders” index (0.887 and 0.90 respectively) around 50% of the bounce in ISM Services in January can be explained solely by extraordinary seasonal adjustments.

Do you want to know how badly Retail Sales and Inflation numbers were affected by extreme seasonal adjustments in January? You can find the WHOLE editorial here (behind paywall).

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