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.
- Inflation (and oil) downgraded: The major innovation this week was in the inflation-sensitive assets: oil prices returned back to the lower end of its traded range (into the zone where the Department of Energy committed to initiate repurchases of crude oil for the SPR). That, alongside a relatively encouraging April CPI release, helped to catalyze a strong downdraft in short-term TIPS and inflation swaps. The next 2 years of market-implied expectations are now marginally below where they were when expectations were presumed to be anchored at 2% PCE outcomes.
- US growth is holding up: US growth outcomes were only mildly derated over the course of the week. Regional bank stocks fell lower over the course of the week but were still off the realized lows in the previous week. Risk assets traded softer, but the dollar also appreciated and Treasuries also sold off...all consistent with a stable outlook.
- Front-end recession hedging adjust: Fed expectations were mildly more hawkish over the next four meetings. If the front-end of the yield curve is to reflect "recession hedging", then every week where the data does not take a hard nose-dive to recessionary outcomes is a week where front-end market pricing converges closer to the Fed's policy rate, merely as a function of time. It also means that recession hedging dynamics get pushed out marginally further across the front-end.
- A June hike would likely be disruptive for financial conditions and growth expectations: Unless fears swirling around regional bank stocks quickly disappear, the macroeconomic data seems unlikely to unilaterally price in a June Fed hike. If it had proved to be spicy, the April CPI release was an opportunity for the Fed to hype up a June hike, but the data was simply too encouraging, overcoming upside in both used cars and rent. While the committee seems split for now, we suspect Chair Powell will be aiming for the high-wire act of pausing at the June meeting (to further evaluate lags in the effects of policy), alongside a tightening bias to satisfy hawks. It does not seem as if financial conditions and market-implied expectations are prepared for a scenario in which Fed officials start overtly talking up a June hike.
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