Macro shocks and financial conditions – Goldman Sachs

By FXStreet Research Team at Goldman Sachs, suggests that they have argued that financial conditions drive much of the business cycle, but what drives financial conditions?

Key Quotes

“To answer this question, we use the comovement of different asset prices to infer shocks to the market’s assessment of growth, monetary policy, and foreign developments. We then use these macro shocks to explain moves in the FCI for each of the G3 economies.

Monetary policy shocks have the clearest impact because they move all markets in the same direction (in FCI terms). Foreign shocks also often have important FCI effects. In contrast, growth shocks usually have smaller effects because they move the different FCI components—e.g., bonds vs. stocks—in offsetting ways.

According to our model, the sharp tightening in G3 financial conditions in early 2016 was due to a triple whammy of weaker growth, adverse foreign shocks— with most worries focused on China—and tighter policy. In the US, this tightening has more than unwound, partly reflecting easier perceived monetary policy but mostly because of better news from abroad. Conditions in Europe and especially Japan have improved much less, as the markets still view both monetary policy and foreign influences as more adverse.

In general, our measure of perceived …read more

Source:: FX Street