Financial Conditions Monitor - Two-Sided Risks Emerge

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:

Capital market conditions were mildly tighter: While Treasury yields were a little lower over the course of the week, the main dynamic of note stemmed from the banking sector. Regional bank equity prices fell substantially and are raising broader concerns about business model viability amidst higher interest rates. This news had a tightening effect on asset prices broadly, but especially so in high yield credit, where spreads finished the week 20-30bps higher.
A high dispersion economy creates more credit risk alongside upside equity risk: Both the nonfarm payroll data and the household survey signal an economy that is growing at a very respectable pace. Global PMIs are also signaling that growth is stabilizing and potentially poised for a mini-upturn in H2. At the same time, there is clearly still a slowdown afoot, one that is pressuring regional banks in particular. The knock-on effects of regional bank fragility to other real economic sectors remains far from clear. In this sense, it makes sense that corporate credit conditions are tightening more noticeably than equity market conditions more broadly

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