U.S. economic data has turned weaker recently, driving up market expectations for a rate cut, $ Dow Jones (.DJI)$ $ S&P 500 (.SPX)$ and $ NASDAQ (.IXIC)$ are at new highs. Long-end rates are down 40bp to 4.3%, and the 30-year is also down to around 4.5%, and gold and commodities are also up.
All of this stems from the easing of financial conditions, reflecting their reflexive impact on the economy.
Financial conditions are composed of short- and long-term interest rates, credit spreads, equity prices and exchange rates, with long-term interest rates, credit spreads and equity prices having the greatest impact.
business sector perspective.
The decline in long-term interest rates has pushed down mortgage rates, stimulating demand for real estate; rising stock prices have brought about a wealth effect, boosting consumption growth.
The corporate sector benefited from lower financing costs due to lower long-end interest rates and credit spreads, while a weaker exchange rate boosted export competitiveness and overseas revenues.
Population sector
The decline in long-term interest rates to promote mortgage rates down, is expected to stimulate demand for real estate, but due to the current rental rate of return and mortgage rates are basically the same, the demand is more sensitive to changes in interest rates. Home sales may rebound slightly in the next 1-2 months, but the magnitude is limited.
Rising stock prices bring wealth effect, is expected to promote consumption growth, but April retail sales data weakened, showing that there is a time lag in the wealth effect.
Interest rate cuts and transactions to promote financial conditions to loose, the real economy has a certain pulling effect, but there is a time lag and the magnitude is limited.
Overall, there is a time lag in the economic impact of the easing of financial conditions, and it will be difficult to fully offset the effects of the previous tightening in the short term.
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