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Macro Precast
DeepMacro Is Closer to the True Number
Date/Time of Macro Precast: 6/15/2016 09:45 AM NY time.

Date

Time

Last

Market
median

DeepMacro
precast

Mo-Mo Chg
Standard deviations (last 2 years)
Date and time are NY time.
Conclusions
*Rates and currencies appear more correlated with DM forecast errors than the market median forecast error.
*This suggests that the DM precasts are closer to the "true" NFP than mkt median forecasts are -- which should
be a selling point for DM.
Background
Just to get an idea of how big the revisions can be, the attached chart shows final-initial over the last six years
or so. Clearly these revisions can be substantial.

Rationale
We assume that the "news" that markets react to is the true NFP change minus the forecast. The initial release
is only a poor estimate of this true number. The final, fully revised number is not perfect either - we will never
know what NFP really is - but it should be closer to the true number than the initial number is.
From this, it follows that the forecast whose error has the highest correlation with market variables is closer to
the truth. We discussed this at the March board meeting: we basically assume that the market is the final
arbiter of the truth.
Results
I looked at the correlations between market returns and the error from a DM precast model (vs final) and the
market median forecast error (again, vs final). I chose some basic market variables: six month fwd 3 month
eurodollar futures contract; 2y swap rates, 10y swap rates, several USD currency pairs (having difficulty getting
data on the USD indexes), and the SPX. For the "return" of the rates variable I just looked at the change in
rates.
I charted these correlations (calculated over a rolling 12 month window) for a variety of different assets on three
different tenors from the day of the release: 1 day, 2 day, and 5 day returns. These charts are in the attached
zip file. The tenor of the return is indicated in the title of the chart: SPX Index1 is the one day return, SPX
Index2 is the two day return, etc.
The results are encouraging for DM. Starting with rates, the DM correlation with rates has been higher than the
mkt median forecast correlation with rates for most of the time period. This is true for eurodollars, for 2y swaps,
and even for 10y swaps. Below is a chart of the one-day correlation of the 3rd ED contract (in implied rates) vs
the DM (blue) and mkt median (red) forecast errors. We beat. Of the 9 asset/horizon combinations I looked at

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in rates (3 assets, 3 horizons), DM has a higher correlation for most of the period for 7 of them, and the other
two are about tied.

On currencies, I looked at EUR, JPY, and MXN (as an EM proxy). The correlation with EUR on a 1 day horizon
was about a tie, but DM beats on the other 8 asset/horizon combinations.
On SPX, the DM correlation was generally higher for most of the period until late 2015; since then, the two
have been about the same. As Chi-Fu has pointed out, the impact of an upside surprise on SPX is ambiguous.
A positive earnings surprise should be positive, but the resultant positive rates movement may be negative (as
those earnings are discounted at a higher interest rate). One way of reading the recent correlations is that as
the Fed approached and then achieved "liftoff", the market began to weight the (negative) impact of a surprise
on rates more than the (positive) impact on earnings. Makes sense to me.
Final
We feel that DM precasts have four primary selling points, relative to alternatives
(1) They are earlier
(2) They are "truer"
(3) They can capture intra-month turning points better
(4) They can be used in the medium-term "view of the world" and asset portfolios.
This analysis speaks to the second of these selling points. Quite encouraged to see this, as I think it is the
hardest claim to make.

Figure 1.

Source:

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Figure 2.
Source: DeepMacro, LLC.