Inside The Surprise Index

Eliminating Surprises Using Citigroup’s Surprise Index

Citigroup’s – Citi Surprise Index (CSI) is a real-time model, designed to analyze the accuracy of Wall Street’s economic forecasts. A positive index value indicates that recent economic data is stronger than the consensus of economists’ expectations. A negative reading denotes economic data which is worse than expectations. Unbeknownst to most investors, the CSI also serves as a gauge of sentiment and provides unique insight into how well economists understand the current economic cycle.

Appreciation for the multitude of messages provided by the CSI allows investors to stay a step ahead of the economic models that Wall Street, and by default most investors, rely heavily on to forecast market levels and securities prices. This is more important than ever now as markets appear more concerned with economic data’s deviation from forecasts and less concerned with the absolute reading of the very same data and what it signifies for economic growth. At 720 Global, our objective is to help investment professionals outperform and differentiate themselves in many ways. We believe offering unique and substantive analysis, such as this unique way to interpret the CSI, affords insights that go well beyond the obvious and superficial.

The Citi Surprise Index

The graph below plots the CSI since 2003. Positive readings are in green and negative readings in red. Bear in mind that a positive reading means economists have underestimated economic data, thus the label “Pessimistic” in green at the top. Conversely, negative readings indicate economists have overestimated economic data, thus the label “Optimistic” at the bottom. The figures below selected points are the number of days the index was consecutively negative (more on that later). The simple takeaway from the chart is that economists constantly shift between periods in which they are overly optimistic and overly pessimistic. This gyration is to be expected as economists notice errors in their forecasts and adjust their models to reflect the current environment. Interestingly, the adjustments to their models do not result in better forecasts as evidenced by the continual see-saw pattern of the index.The second graph further highlights this point by plotting the 1 year volatility (standard deviation) of the index. This graph illustrates the extent to which economists’ consensus forecasts deviate from the actual outcome without regard for direction. Since 2003, there are gradual ebbs and flows in the volatility of the index but not a clear sustainable downward trend, which would signal an improvement in forecasting skills.