CPInumbers,surpriseelementandEMH

Today there will be some important data points coming out, inflation print in the US, India etc. Markets will be keenly watching it and any surprise will be quickly reflected in the asset prices. It is interesting to note that the actual hard number will be of little interest, it is the deviation from the expectation which matters i.e. the surprise in the news. Nassem Taleb writes about his career as a trader before becoming the uber philosopher in the book Fooled by Randomness. He writes that as a market guy his job was to react to this infinite stream of incoming data from multiple screens in front of him and in most cases, he was not even sure of what the data point meant. His main job was to take a bet depending on how many of degrees of separation existed between the expectation and actual numbers. He specifically gives example of the durable goods data where he had no clue on what durability actually means in the context of goods.

The US CPI is expected to print around 3.5% on the YOY basis for the month of April. Inflation is important because inflation targeting is a key mandate for Fed. Any high data point above the target number of 2% has to be justified that why it is transitory and not structural. Various intellectual nuggets like “pent up demand”, “supply bottlenecks”, “higher disposable incomes” will be thrown into the discussion to make the explanation more lively and more arcane at the same time. As per Taleb, the foot soldiers in the markets whose job it is to instantaneously react hardly care about all these intellectual distinctions and follow their instinct. They put a price on the table. This market characteristic goes well with the EMH (efficient market hypothesis) argument first propounded by Eugene Fama in 1960’s. Readers would do well to read the EMH argument and its requirements. EMH exists in a world where the access to information is instantaneous and equitable and there are no impediments to trade. Only in that case EMH will work, this is not the case sadly in the universe in which we reside.

So, the follow up questions matter. If there is a big surprise on let’s say a data print, one can gain valuable actionable insights by asking how was the data collected, was there a change in methodology, was there a concentration bias in choosing the respondents, were the foot soldiers even able to reach the survey responder properly. Readers would remember that amidst a strict lockdown because of the virus last year, many data points had to be postponed because of the operational difficulties. But then the readers can justifiably argue that even these infirmities are known in advance and hence have been assimilated in the market price already. This is sort of true.

Coming to the market wrap, the Dollar Index briefly traded below 90 yesterday which was its lowest since end Feb. The Dollars loss is a gain for the Euro and Pound both of which continue to trade strong around above 1.21 and 1.41 respectively. The equity markets again traded with a slight negative bias. Dow Jones ended the day in red whereas the Asian markets like Hang Seng and Nikkei have started the day on the back foot. The US 10-year yields are around 1.62 levels. There was a speech given by Fed Governor Lael Brainard with fairly dovish overtones. He also exhorts us to see the numbers behind the numbers specifically talking about the recent good unemployment numbers. The unemployment rate he says is declining because many working people are not able to join the workforce as they don’t have the support system to take care of their kids. In the absence of school reopening these people are forced out and hence don’t appear in the washed up employment number. Fed as per him is looking at these finer distinctions. The speech is on Fed’s website and in true EMH fashion is open for everyone to read and assimilate.