Goldman with an interesting, Basically, US rate shocks are Chinese growth shocks.
Our global financial conditions index (FCI) has tightened, in part because the Fedhas turned more hawkish in the face of rising inflation but slowing growth. Where are risks to growth from FCI spillovers largest? We estimate rules of thumb for the impact of US monetary policy, growth, and inflation surprises on our FCIs via long rates, equities and the trade-weighted exchange rate index(TWI).
We find that a 100bp hawkish Fed surprise tightens our global FCI by much more(40bp) than a 1pp positive US growth or inflation surprise (both roughly flat). OurUS FCI tightens in response to all three surprises, as do our EM FCIs (to varying degrees), while the effects on DM ex. US FCIs are more mixed.
Hawkish Fed surprises raise long rates, weigh on equities, and depreciate the TWI in nearly every country. We find that a 100bp hawkish Fed surprise tightens our FCI by 80bp in the US (100bp including corporate bond spreads), 70bp inChina, 40bp in the UK and Latam, 30bp in CEEMEA, and 20bp in Asian EMs ex.China. In contrast, FCIs are unchanged in the Euro area, and ease in Canada andAustralia following large TWI depreciations.
Positive US growth surprises raise long rates and equities, but weigh on TWIs in DMs. We estimate that a 1pp US growth surprise tightens FCIs by 5-10bp in the US, Australia, and Canada, but eases FCIs slightly in the Euro Area and Japan (by5 & 10bp respectively). As a result of small moves following positive US inflation surprises, we find that a 1pp US inflation surprise tightens FCIs moderately in the US (+10bp), and slightly in Canada and CEEMEA (+5bp) but leaves FCIs in the Euro area and elsewhere roughly unchanged.
The relatively large impact of Fed surprises suggests that news about the Fed’s criteria for slowing down or speeding up from a 50bp hiking pace will b eimportant for global FCIs. Further hawkish developments would weigh on global growth, mostly via the US, China, and EMs, but have limited spillovers to the Euro area, and actually possibly support growth in Canada.nThat said, FCIs may respond more to inflation and growth surprises than our statistical estimates suggest because they matter for Fed policy, especially when the economy is overheated.