Tian Yang, Variant Perception's Head of Research, recently covered their must-read Understanding Leading Economic Indicators report with FS Insider. Yang explains the three major categories that most economic data fall into, how leading economic indicators (LEIs) help identify Understanding Leading Economic Indicators report, why most economic data in the news is lagging and not helpful for investors and, most importantly, the message coming from LEIs currently on China, Europe, Canada, and the US, especially when it comes to the outlook for inflation.

Focus on Leading Economic Indicators

Variant Perception's leading economic indicator framework helps to solve the problems of out-of-date or yet-to-be revised data, including GDP and inflation data, said Yang. There also tends to be too much averaging of market performance, Yang stated, and analysis based on this technique ultimately ends up producing regression models. These tend to produce results that are more accurate on average, but miss the big turns in the market.

“We want to find data that's leading, focus on turning points in the leading data, and also focus on the data that's minimally revised or not revise at all. What we've found is the sweet spot tends to be around 6- to 12-month leads, and we're specifically looking for stuff that has a lead in that period. … The key is capturing the really big turning point moves. And I think that's where the leading indicators will add a lot of value.”

Inflation Disconnect

Markets are too complacent about inflation expectations in the US, Yang stated, partly because of this over-emphasis on central banks targeting lagging data.

If the Fed is trying to target a level in terms of where inflation is headed, they almost necessarily have to build some kind of regression model focused on fine tuning to be correct on average, Yang stated. But, in doing so, they're ultimately less sensitive around turning points, as Yang believes we are in now.