Anyone who follows the capital markets knows that they can be full of surprises. The same can be said for the economic data, too, and right now it has been filled with mostly negative surprises.
The important distinction when discussing surprises is that a negative surprise doesn't necessarily mean the report itself was bad. It simply means the data did not live up to economists' expectations.
From that standpoint, one could argue that it is the economists' forecasting ability that is subpar and not the data.
Making a Case
A case in point is the Chicago PMI report. It checked in at 61.9 for February. A number above 50.0 denotes expansion, so it is evident that manufacturing activity in the Chicago Fed region is running strong. In fact, the reading for February 2018 is 8% above the year-ago period and above the strong average of 60.8 for 2017.
The Briefing.com consensus estimate for the February Chicago PMI report, however, was 64.5. In other words, the Chicago PMI reading, while strong, still qualified as a negative surprise.
The prevailing message in an environment that has its share of growth drivers -- from fiscal stimulus to the wealth effect to relatively low interest rates -- is that economists have been erring on the upside with their expectations.
That understanding has manifested itself in the Citi Economic Surprise Index, which is a snapshot of how incoming data has measured up to consensus estimates.
What It All Means
One can see that the surprise momentum that was building in the latter half of 2017 has not persisted in 2018. That's partly because the aforementioned momentum helped inflate growth forecasts that have not necessarily manifested themselves in the data.
The rub for the Treasury market is that if the data keep undershooting economists' average expectations, it is apt to help temper concerns about inflation and the Federal Reserve agreeing to four rate hikes this year.
Should that be the case, both the front end and the back end of the yield curve should settle down from the negative surprise factor they have created in 2018. And if they settle down, the stock market will presumably settle down too.