Financial Conditions Monitor: Tightening Returns As A Growth Headwind

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.

Takeaways:

Inversion of last week - tightening now driving growth: Financial conditions largely tightened this week, with credit and equity valuations cheapening despite improved earnings expectations. Short-term interest rates and mortgage rates also continue to trend higher, while exchange rates are now appreciating due to a persistently weaker Chinese Renminbi.
A little more than one more hike for the rest of the year: A 25 basis point July hike is priced in for the rest of the year, with linearly decaying probabilities of a hike over subsequent meetings. Interestingly, market pricing does not predominantly expect...

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