Looser Financial Conditions Should Support Economic Growth and Stocks in the Second Half

Proxy metrics for financial conditions from the US dollar, to interest rates to corporate bond spreads have been loosening since June and suggest continued moderate economic growth in the second half of 2017 and a firm equity market. In this post we’ll briefly highlight how these measures of financial conditions point to a firmer manufacturing PMI, which is our preferred leading economic indicator and is itself a coincident indicator to rates of change in stock prices.

We’ve been pointing out the weakness in the USD all year, but it wasn’t until recently that the year-over-year percent change (the measure inversely associated with economic growth prospects) finally turned negative. The year-over-year percent change in the USD (blue line, left axis, inverted) leads the US manufacturing PMI (red line, right axis) by four months and suggest dollar weakness should be a modest tailwind to economic growth in the months to come.

Similarly, the six month rate of change in the US 10-year treasury bond yield tends to be inversely correlated with economic performance with a six month lead time (blue line, left axis, inverted). Since the end of 2016 long-term US interest rates have moderated and thus taken some pressure off businesses and consumers. The lower rates we’ve seen so far in 2017 should support PMIs through year end (red line, right axis).