Commentary from Goldman Sachs
(this is via eFX)
Growth
views continue to make progress, as manufacturing data in the US seem
to have turned the corner. The February US ISM ticked higher, regional
surveys have shown incremental improvement on top of that, and the
more-forward-looking new orders to inventory ratio suggests that there
may be more room to run. Over
the last week, the degree of easing in US financial conditions has been
quite large, ranking in the 95th percentile, historically, with nearly
all sub-components contributing to that easing and moving by similarly
large amounts. Although we had been concerned that an improving growth
outlook would give way to restrictive rate views it seems as if
accommodative policy is helping to fuel markets alongside a better
growth outlook. Indeed, market focus on the impact of an easing in US
financial conditions has picked up recently, with relative returns
across global equity indices and across (trade-weighted) currencies
driven by relative exposure to easier US financial conditions. More
broadly, over the last week, as financial conditions have eased, yield
declines have coincided with a pick-up in the S&P, indicative of an
easing shock working through the system as opposed to a growth shock.
This stands in contrast to Europe, where, despite a small decline in
yields, growth views have stumbled and equity markets have not been as
buoyant. Reflecting the
balance between the recent relaxation in risk and lingering concerns,
front-month equity volatility – as measured by the VIX – has declined
sharply and is now below 14 (a low for the year and in line with 2014
and 2015 average levels). Yet, the forward curve has steepened and is at
the wide end of its recent range, with the August contract in the 20
range.es.
An April hike is not our baseline case but is certainly a possibility –
a message reinforced by recent Fed speakers. European geopolitical risk
continues to be a major focus as well on several fronts, as underscored
by the attacks in Belgium yesterday. on its EU membership slated for June 23, a week after the June FOMC meeting, and the refugee situation across Europe. could
intensify as the primary process comes to a close, bringing more market
focus to the uncertainty surrounding the outlook for US policy.
Goldman Sachs says financial conditions eased, market sentiment improved
