We systematically track the evolution of financial conditions and their underlying drivers. We intend to share regular updates of these systematic monitors with our donors on a more exclusive basis (so long as it does not compromise our public mission). This monitor is a reflection of how we think macroeconomic and policy dynamics are affecting financial conditions and, by extension, our assessment of the economic growth outlook.
For the sake of brevity and efficiency, we will keep all written content in our takeaways section.
- The big story this past week was about how higher growth and inflation were priced in, specifically to Fed pricing: It's not a surprise that as activity data has continued to stabilize (as per our activity monitor) and as cyclical sectors continue to exit contraction, a firmer growth outlook is increasingly getting priced in to financial conditions. Corporate borrowing costs are roughly unchanged, but beneath the hood, we see tighter credit spreads and higher risk-free rates. Credit and equity risk premium compression, alongside higher Treasury yields and a stronger dollar, are reasonably consistent implications with a more resilient growth outlook. We would specifically flag that Friday's hot PCE release keeps a June hike as a plausible non-baseline scenario of moderate probability. A hike by July is now priced in and this seems very reasonable given the still-split views on the FOMC. If the Effective Fed Funds Rate stayed flat through June relative to the Interest on Reserves, it would imply a >50% market-implied probability of a June hike. We caution that this is not necessarily the right assumption in Takeaway #3.
- Regional bank and debt ceiling tail risks marginally dissipated: Regional bank stocks marginally traded higher this past week but are still substantially depressed relative to the pre-SVB state of affairs. This tail risk is likely...
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