Charts of the Month - September '23
The Big 7 vs. The Old Guard, The U.S. Consumer - Not Dead Yet, and The Dirtiest Cities in the World
The Goldman Sachs Financial Conditions Index (FCI) is defined as, "a weighted average of riskless interest rates, the exchange rate, equity valuations, and credit spreads, with weights that correspond to the direct impact of each variable on GDP."
Simply put, it's a composite index that tracks how loose or how tight financial conditions are in an economy.
A higher number implies tighter conditions and is usually conducive to forward-looking economic expansions. The opposite holds true as well - a lower number implies looser conditions and is conducive to forward-looking economic contractions. So, high (or increasing) FCI should make you more worried, and low (or decreasing) FCI should make you more relaxed.
This month's chart, a look at the implications of the FCI vs. Inflation, was recommended to us by Jack Farley (contributor below) and was suggested to him by Nick Glinsman (also below).
"I believe that with regard to inflation, the wrong question to ask is ‘when inflation peaks’, whereas you should really be considering how far the Fed and other central banks are behind the inflation curve and what they need to do.
The most recent readings had the CPI up by 8.6% year-on-year [this was written before yesterday's print] and the personal consumption expenditure (PCE) deflator at a 6.3% rate. The Fed can take solace in the core PCE rising only 4.7%. But that is still historically elevated and suggests that the Fed would have to make a stark break with precedents if a pause hinted that it could declare “mission accomplished” when those core price increases, which exclude food and energy, were still running well above its policy rate.
Focusing on the US Financial Conditions Index in the chart, we can hardly define them as “tight”. Just consider those two previous periods of tight FCI (’08 and ‘15), and then ask the question, how much tighter should we really be, given where inflation currently stands by comparison? I would posit significantly tighter, implying hiking rates and ultimately pushing this stock market lower, perhaps a lot lower.