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Goldman On FCI Hitting Fresh Peaks

US OUTLOOK/OPINION
  • Helped by Chair Powell's comments at Jackson Hole, the market has now fully unwound the easing in financial conditions in July on prior hopes of a Fed pivot, taking Goldman’s FCI to fresh peaks after tightening 90bps since Aug 12.
  • Hawkish policy shifts are the clear driver “as the market has relaxed somewhat about growth risks since the middle of the summer”, but “given the deceleration in global activity, a further hawkish-policy-driven shift in financial conditions would likely see the market revisit its growth worries”
  • They see the risks to front-end US rate pricing as more balanced than before but fading rallies here likely makes sense. However, “there are more ways for real yields to move higher over time than lower, and there is room for the market to price a higher risk of hikes extending into 2023.”
  • Still broadly USD-supportive, particularly against JPY and CNH where policy is not tightening, “but while USD longs are more robust to growth worry than rate shorts, we think the Sharpe ratio may be lower here too, particularly after some large moves.”
  • Equities may be being supported by commodity price relief and continued positive US growth to stay off June lows “but the ongoing rise in real yields continues to pressure valuations, and we think the balance of risks there still skews lower”.
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