Investing 101

Citi Inflation Surprises is a long-standing series published by Citi’s FX research department to gauge whether inflation is “beating expectations” of economic forecasters - this is very much the concept of a company beating analyst expectations, applied to a whole economy.

Inflation surprises provide a gauge of inflation’s trend and are regarded by Currency and Treasury traders as a way to build expectations for Central Bank actions.

For example, when inflation is accelerating (as we saw throughout 2021), this leads to negative performance in the equity market as fears of the FED hiking interest rates and tightening monetary policy sends investors into equity sell-off mode. 

As a result of COVID, in an attempt to supercharge the economy, the FED had set interest rates to almost zero and injected liquidity into the economy through stimulus payments and bond buybacks. This abnormally inflated the purchasing power of individuals and to offset this (and the hiccups in the global supply chain), prices had to subsequently increase. To be precise, prices increased at their fastest rate since the early 1980s and saw a 7.5% rise in Jan 2022. 

With several rate hikes in 2022, this would cool off the aggregate demand and balance the demand and supply of money. Slowing inflation (but not deflation) is often positive for equity performance because it can lead to easing monetary policy by the Federal reserve, interest rate cuts and less stress for investors (hence willing to take on more risk). 

![citi inflation surprise](https://storage.googleapis.com/toggle-webcm-prod/https://storage.googleapis.com/toggle-webcm/citi_inflation_surprise_36928bcdbd/citi_inflation_surprise_36928bcdbd.png)

CISI is a long-standing series published by Citi’s FX research department to gauge whether inflation is “beating expectations” of economic forecasters.

Citi Inflation Surprises

Economic Indicators

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Citi Economic Surprises is a long-standing series published by Citi’s FX research department to gauge whether the economy is “beating expectations” of economic forecasters - this is very much the concept of a company beating analyst expectations, applied to a whole economy.

Improving economic growth is generally better for company earnings, while a slowing economic growth can hinder company earnings, as shown by a lot of Q4 2021 earnings calls with the current market environment. 

Several economic indicators are included in the basket and the weights are based on the impact that economic surprises have on FX crosses.

Economic surprises are meant to be used mostly in FX trading, but most investors use them to gauge whether the economy is on an uptrend or downtrend for broader economic allocation.

Stronger-than-expected economic growth is generally better for company earnings (although it depends on the exact nature of the business). However, when accompanied by rising interest rates it can temper a bullish market sentiment.

On the other hand, weaker-than-expected economic growth is generally bad for company earnings (again, dependent on the exact nature of the business). However, when accompanied by declining interest rates it can temper a bearish market sentiment.

![citi economic surprises](https://storage.googleapis.com/toggle-webcm-prod/https://storage.googleapis.com/toggle-webcm/citi_economic_surprises_7aba9e4091/citi_economic_surprises_7aba9e4091.png)