Uddrag fra BNP Baribas:
After loosening through 2017, financial conditions have tightened sharply this year, retracing about two-thirds of last year’s accommodation.
Historically, financial conditions tighten alongside Fed hiking cycles, making last year’s
loosening atypical. We think financial conditions could reach longer-term neutral levels by
year end.
Along with fading fiscal stimulus, tightening financial conditions factor into our belowconsensus forecast for 2019 growth of 1.4% q4/q4.
Persisten narrow corporate bond spreads have been a key feature of this cycle, highly
leveraged corporates could be both cause and victim of continued tightening conditions.
We find financial conditions indices useful in projecting cyclical developments in the economy. Financial conditions have tightened this year after easing last, which was an unusual development, as financial conditions tend to tighten during Fed hiking cycles, which contributes, along with fiscal policy, to our above-consensus growth forecasts for this year.
Next year, we expect not only the temporary boost from tax cuts to fade, but think financial conditions, in addition to their tightening thus far, could tighten further if they revert to more typical behavior of past Fed hiking cycles. This makes us more pessimistic on growth going into 2019 than consensus.
Over the first two years of the current Fed hiking cycle, we saw a substantial tightening in
financial conditions according to our financial market conditions index (FMCI), by about 1.5
standard deviations from its longer-run average (about the last 30 years), bringing them to about a neutral overall level, especially in 2015. This tightening came mostly from the exchange rate but also 2s10s flattening, which typically is bearish for growth.
Despite the Fed delivering three hikes over the year, 2017 saw overall financial conditions reverse course and loosen by about 1.5 standard deviations. Lower corporate bond yields, narrowing money market spreads, rising equities, and a depreciating real effective exchange rate all were drivers. This year, however, financial conditions have tightened, by about a standard deviation according to our FMCI. A strengthening dollar and tighter money market liquidity, and flat equities have driven overall financial conditions tighter.
Until this year, financial conditions were behaving atypically for a Fed hiking cycle, as usually broader financial conditions tighten as the Fed hikes. If we project the typical historical relationship between fed funds and our FMCI forward through this year, we can expect another 0.5 or so standard deviations of tightening given our forecast for three more fed funds hikes, which would leave overall financial conditions
at neutral levels over about the last 30 years, but around the tightest they have been in the post crisis period.
The previous time we hit those readings, in late 2015, the economy came close to stalling.
We find that activity lags our FMCI by a relatively short period – about two quarters or so – while consumer prices react to our FMCI at relatively longer lags – about seven quarters or so. Roughly, we find that a one standard deviation move in our FMCI relates to about a 2.5x move in year-on-year industrial production growth and about 0.3pp on year-on-year core CPI.
