Leading Indicators Carlos Capistran Merrill Lynch (Mexico) [email protected] Brace for faster global growth ¢ Our leading indicator of leading indicators (LILI}, shows that global growth will likely continue to improve in early 2017. ¢ Faster global growth as anticipated by LILI supports higher rates and reflation. A leading indicator of leading indicators Investors use leading indicators to try to anticipate turning points in economic activity because those turning points drive FX, rates and stocks. One transmission channel is that turning points usually anticipate monetary policy changes. The most reliable leading indicators available summarize a battery of activity, financial and qualitative variables. One example is the set of Composite Leading Indicators (CLIs) calculated by the OECD, which is heavily used by policy makers and market participants. The problem that we have with leading indicators is they are not really useful to market participants because they move after the market does. That is, leading indicators anticipate growth but not the market because they use financial variables to anticipate growth. Leading indicators rely heavily on interest rates, stock market indexes and exchange rates because they incorporate vast information quickly. LILI solves the problem in two dimensions. It is not based on financial variables. Rather, LILI is based on qualitative data, consumer and business confidence, which we believe are optimal to capture “animal spirits.” And, it is constructed explicitly to anticipate the CLI, as we use a dynamic forecasting regression with lags of consumer and business confidence to calculate LILI. The signal for early 2017 LILI indicates that in early 2017 global growth will continue with an improving economic outlook (Chart 23). Consumers and firms seem to be bullish around the world, because LILI anticipates an even stronger outlook than the CLI. Here global growth means growth in the OECD plus the six largest non-OECD memb