A slowdown but no recession was a common theme at our conference a few weeks ago. In this short Macronote, I thought we could take a look at what the numbers say. To help me out I am using a Monetary Conditions Index favored by the ECB and with a methodology similar to that of the Wu-Xia shadow interest rate in fashion a few years ago. The interesting thing about this variant of the ubiquitous monetary and financial conditions index you come across in almost all analysis these days is that it tries to take into account direct and indirect effect of FED’s “quantitative tightening” (QT).
For now, we don’t have a feature that allows you to use statistical output in the principal component calculations for weighting schemes (etc.) directly in the application. But rest assured we have a very focused individual working fervently on getting this done. Instead, I recalculated the weights and a scale factor in an excel file (supplied here). Which is why I have to use a quite diffuse pair of calculations in the Macrobond-file. Hopefully, you can see where the numbers come from and where they re-enter the calculations again.
Enough with the statistical excuses Roger – show us the money!
After a few years of gradually deteriorating financial conditions; interest rate hikes, quantitative tightening, we reached “sub-zero” – signaling tightening conditions – during summer last year. As it happens, a simple correlation analysis indicates that this index leads the business cycle (measured by final sales) by at least six months which happens to rhyme well with actual developments, i.a. all the disturbances during November and December. Personally, I must admit to thinking that monetary conditions had also continued to deteriorate during the final months of last year, which is obviously not true from looking at the graph. Instead the MCI stabilized and is currently hovering around zero.In short, a more “advanced” version of an MCI-index, also taking into account the impact of quantitative tightening (and easing), suggests that the high-profile panelists at our conference who suggested a slowdown, but no recession, may actually be proven right. – At least for now.
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