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.
Takeaways:
- Discussions of Higher R Star Will Remain: Treasury yields continued to move higher, inflation breakevens were relatively stable, and the yield curve steepened, albeit from still historically inverted levels. All of this added to the ongoing market discussion about whether the Fed will raise its estimates of the neutral interest rate ("r-star"). We are skeptical the Fed will ratify such speculation imminently, especially given recent remarks from NY Fed president John Williams and Fed Chair Jay Powell. It seems quite suspicious that a rise in realized risk-free rates has catalyzed this entire discussion and ironically in the context of disinflationary supply-side improvement. Policy stance would be more robustly described by comparing nominal risk-free rates (and their affects on nominal financial conditions) to the pace of expected nominal GDP, consumption, and income growth ("R-G"). Otherwise it's merely a backward-looking glorified moving average.
- Fading Growth Impulse: Taken in totality, implied growth expectations are have not improved materially over the past two weeks after a month of more noticeable improvement...
- Stable Fed Pricing: Implied market expectations for Federal Reserve policy were relatively unchanged, with the reduction in 2024 cut probabilities...
- Energy Remains The Primary Achilles Heel: Crack spreads still remain an issue...
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