U.S. financial conditions sit around levels observed in early May & early June, despite the Fed delivering 200bp of tightening since the start of May. An elevation in recession worry, a pullback in market pricing re: the terminal rate of the current Fed hiking cycle (along with the Fed reaching its estimate of the long run estimate of interest rates), speculation surrounding a dovish Fed pivot, along with a related pullback from cycle highs when it comes to mortgage rates and a retracement in equities from YtD cheaps are the main drivers for the moderations from recent tights in financial conditions.
- Financial conditions had been on a fairly one-way tightening trajectory through to their June peak (from the all-time lows lodged last year), with the subsequent pullback likely a key input when it comes to the recent hawkish musings from some of the historically dovish regional Fed Presidents (namely Daly and Kashkari) as the Fed looks to underpin its fight against inflation.
Fig. 1: Goldman Sachs U.S. Financial Conditions Index
Source: MNI - Market News/Goldman Sachs/Bloomberg