Macro Shocks and Financial Conditions – Goldman Sachs
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 shocks lines up fairly well with
measurable data or policy surprises. But when a gap opens up without a
compelling explanation, opportunity beckons. For example, the sharp
deterioration in perceived US growth in the first quarter presented—and
perhaps still presents— a good opportunity to take a more constructive
view. The tightening in perceived policy in Japan since late 2015 may
likewise present an opportunity, assuming the BoJ’s true intention is
still to ease.”
