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Expectations Can Set the Course for Growth, Fed Rates and Markets

Expectations Can Set the Course for Growth, Fed Rates and Markets

Talking Points:

  • Expectations among consumers, market participants and policies can lead to economic and market realities
  • There is a strong correlation between consumer confidence surveys (leading) and realized GDP figures
  • Similar anticipation-led realities can be seen in Fed policy and speculative market reach for the likes of US equities

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Are economic and market performance a self-fulfilling prophecy? Traditional fundamental's suggest that actual growth, earnings, investment, etc lead to economic and market benchmark levels. However, there is plenty of evidence to suggest that at least the reach for speculative assets can reach beyond their 'book' value. Yet, more broadly, that academic interpretation of where price 'should' may find more in expected outcomes than realized arrivals - and the former may event ensure the latter. Self-fulfilling prophecies aren't just a placebo effect when it comes to growth. We can see it regularly through the months, years and decades.

Perhaps it is easiest to accept that expectations can result in realities for speculative assets. However, when we consider the function on more general economic basis, it is logical to expect the same is true of economies. The data can also suggest that to be the case. This past session, an update on US consumer confidence for the month of February was released by the Conference Board. The 15-year high was encouraging and distracts from the otherwise lackluster economic figures that we have seen reported these past months. Does this mean that official GDP statistics are due for a sudden swell? Looking back over the correlation between the two, there is a definitive relationship between sentiment measure and measured output - though it is far from perfect. Logically, this could follow sound reasoning. The US economy - the world's largest - is heavily disposed to US consumption. By some estimates, it accounts for three quarters of GDP. That being said, if consumers are confident; they are motivated to spend, borrow and invest to promote that very expansion they expect.

There are other areas where anticipation can translate into reality. Inflation expectations are a component of the more popular sentiment surveys as well as market-based breakeven rates. Their precedence for actual inflation is a strong leading indicator. Further down the speculative chain, rate expectations can lead actual changes to monetary policy. Considering the Federal Reserve doesn't want to deliver a surprise to a market that is flighty, seeing the speculative rank pricing in a hike can prove a green light to policy officials to act without unfavorable reprisal (volatility). And, then of course, there is speculative influence itself. Belief that dividends, yield, interest will reach a certain level to justify higher prices can push markets higher even if those figures yet exist. And, often times, those expectations lead market astray to be corrected in an unceremonious swing in markets. We discuss the effect of expectations on reality in today's Strategy Video.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.