With the debate over inflation dominating financial markets as the global economy reopens from the COVID-19 pandemic, investors turn to various so-called alternative data sources in an effort to get a more readable timely of what happens to prices around the world.
Although readings on the consumer price index, the producer price index and the Federal Reserve’s favorite measure, the deflator of personal consumption expenditure, are published once a month, they offer a retrospective picture. of the situation around prices three or four weeks earlier.
“This is where real-time alternative data comes in,” Wolfe Research senior analyst Yin Luo said in a telephone interview, offering “a more timely measure of price movements than official data, which tends to be delayed. “.
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The ability to get a more timely reading of market-sensitive data trends has been driving the widespread adoption of alternative data for years, but the COVID-19 pandemic may have an overburdened interest, as investors and economists they have strived to make sense of an almost unprecedented situation. the shutdown of economies and a subsequent reopening, vaccine-enabled, affected by the supply chain and complicated by the spread of coronavirus variants.
Interest in macro-centered alternative data has likely quadrupled since the pandemic, Luo said.
Meanwhile, the so-called reflation trade – a bet that the assets most sensitive to the economic cycle or willing to benefit from a rise in inflation would outperform their peers – has been fading and declining in 2021. Its path depends on whether investors see inflation as a danger of soaring and possibly becoming a spiral or more likely to be, in the Fed’s preferred term, transitory.
One of the best known resources comes from PriceStats, a business that emerged from an initiative by the Massachusetts Institute of Technology known as the Million Price Project in 2008. The project arose from research by economists Alberto Cavallo, now at Harvard, and Robert Rigobon.
PriceStats, which joined State Street in 2011 to bring its data to the financial services industry, scraped the web, tracking daily price changes in a huge basket of goods in 23 economies. PriceStats focuses solely on “multi-channel” retailers offering both online and offline products, eliminating large retailers exclusively online, including Amazon.com Inc. e-marketing. AMZN,
PriceStats scratches product descriptions and prices, sorting them into rankings. Calculate price changes each day and use official weights used in a country-specific inflation indicator to create an index.
The result is a real-time look at a wide basket of products for each country. Of course, not everything is online. And PriceStats, for example, does not track used vehicle prices, which have skewed U.S. inflation data in recent months. Nor does it track house prices, for example, but it does offer intermediary servers, such as construction supplies, that have historically closely monitored those prices.
The data provides an insight into inflationary pressures with an approximate two-day delay, in contrast to the several-week delay offered by official data, Marvin Loh, a senior global market strategist on State Street, said in an interview. Equally important is having a series of prices for 21 different countries, he said, because inflation is a global issue, which makes it useful to see how global price pressures manifest themselves in individual countries and regions.
Loh said he found that online prices are adjusting faster than shelf prices. In 2020, when the pandemic hit, prices tracked by PriceStats fell much faster than official data reflected. On the rebound, the basket showed stabilization entering prices, while official data reflects items that are not there, such as used cars and plane tickets.
What can be taken away is that the data showed upward pressure in relation to the appearance of a normal June or July, “but not accelerating the way it did in early spring to summer.”
Investors may also try to discern expectations about inflation by following the news. Ravenpack, an alternative data provider specializing in using natural language processing (NLP) to analyze the news, said this approach provided information on a shift in investors ’expectations about inflation in May.
Ravenpack sets up systems for customers that track specific issues, and that each news item is assigned a sentiment score, explained Inna Grinis, the company’s head of macro strategy.
An article on rising inflation would receive a negative sentiment score, for example. The score also takes into account the magnitudes mentioned in the story, he explained. For example, if an article reported that inflation rose 4%, the score would be higher than if prices rose 1%.
The data provided information to customers perplexed by a decline in U.S. Treasury yields following a rebound earlier this year that had been attributed in part to expectations of a lasting resurgence of inflation. The chart below tracks the weekly count of news articles containing the words “reflation” versus “transient” and “inflation” headlines.
Grinis said the approach allows users to track the importance of “reflation” and “transient inflation” narratives in real-time market comments.
The graph shows that the narrative of the reflection began to gain momentum in the summer of 2020, reaching its peak in late February and early March, before the 10-year Treasury note produced TMUBMUSD10Y,
reached its peak at the end of March, with only 1.80%. On June 10, when the basic consumer price index rose 0.7% month-on-month stronger than expected, bond yields continued to decline, according to the narrative of transitional inflation, he noted. Grinis.
Grinis stated that since mid-June the narrative of reflection and transient inflation appears to have fluctuated in importance. The narrative of the reflection escalated around the release of the June 13 July CPI data, which was again much hotter than expected. Ten-year profitability initially increased, but then declined, in line with a drop in reflation concerns, he said.
The 10-year yield on Monday fell below 1.15% to its lowest level in nearly six months. Meanwhile, the US stock market has continued to grow throughout 2021, but with different sectors and styles coming in and out of favor as inflation expectations have changed.
The Dow Jones Industrial Average DJIA,
so far it has risen more than 14%, while the S&P 500 SPX,
has advanced more than 17% and the Nasdaq Composite COMP complex,
increases by more than 14%.
Companies can also use NLP analysis to monitor 10-Q and 10-K corporate conferences and presentations, which can give an aggregate view of rising ticket prices, plans to pass on increases in prices and other inflation markers, said Luo of Wolfe Research.
While not as timely as data on spending or prices, these readings may provide information on labor costs and labor shortages, such as the pay rise at most large banks for smaller bankers. , said Luo. It is also worth scanning central bank policy announcements, speeches and other documents to select patterns.
Of course, many alternative datasets are out of the price range of individual investors. Also, no data set should be seen as a silver bullet that would give the investor the key to instantly superior returns.
The use of alternative data in addition to traditional data provides a more diverse set of entries. As Luo has described above, it echoes the investment industry’s proverb that describes holding a diversified basket of assets as the only “free lunch” in finance. The same principle applies to data.
But investors don’t necessarily have to break the bank to incorporate real-time data, said Nicholas Colas, co-founder of DataTrek Research.
“Our approach to data is to use freely available resources to assess market narratives,” he said in a July 23 note. “Because of the economic dislocations of the last 18 months, the main numbers and the stories they seem to tell are often misleading or simply wrong.”
Colas said the way the U.S. consumer responds to inflation is a key question for investors during the second half of this year. DataTrek’s approach is to examine the volume of U.S.-based Google searches in terms like “cheap” and “discount”.
“A rise would mean an increase in inflation concerns that could lead to declining consumer demand,” he said. An updated graph (see below) showing search volumes since January 2019 shows that it hasn’t started. With a stable volume for both terms, stagflation does not seem “even close to being a problem for the American economy.”
The example, Colas said, shows that with “the wealth of free information available now, it’s possible to find the real story. You just have to know where to look.”
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