International Monetary Fund November 15 2018 Unconventional Monetary
International Monetary Fund November 15, 2018 Unconventional Monetary Policy, Interest Rates and Asset Prices Cato Institute’s 36 th Annual Monetary Conference Tobias Adrian Financial Counsellor and Director Monetary and Capital Markets Department
US Financial Conditions Are Unusually Easy Last GFSR has been offset by an easing in the US, despite policy rate hikes, … Financial Conditions and US Federal Funds Rate 0, 0 Financial Conditions Index US Financial Conditions Index and Federal Funds Rate (z-scores over 2010 -18 and percent) 2, 5 1, 0 Tighter conditions 1993 -94 -0, 1 1999 -00 -0, 2 2004 -06 -0, 3 2015 -present April GFSR 2, 0 0, 5 1, 5 -0, 5 1, 0 -0, 6 -1, 0 -0, 7 -0, 9 -1, 5 Rate hikes -1, 0 0 1 2 3 4 5 6 Fed funds rate (percent) 7 Financial Conditions Indices of Other Advanced and Emerging Market Economies (z-scores over 2010 -18) 2, 0 Tighter conditions 1, 5 Last GFSR 0, 5 0, 0 -0, 5 -1, 0 0, 5 -0, 8 …which is in contrast with other areas 1, 0 0, 0 Tighter conditions -0, 4 Financial conditions in the US eased, despite policy rate hikes… 0, 0 2015 -2, 0 2016 2017 2018 Federal Funds Rate (lhs) FCI (rhs) -1, 5 -2, 0 2015 2016 2017 2018 AE ex. US China EM ex. China 1
The October Sell-Off Led to Lower Valuations … leading to a significant fall in equity valuations A sharp selloff in US stocks in October triggered a global stock market correction… Major Stock Index Performance (index to Jan 1, 2018; YTD change in parentheses) 12 -month Forward Price-to-Earnings Ratio (z-score since 1987; current value in parentheses) 110 1, 0 105 0, 5 100 0, 0 95 -0, 5 90 -1, 0 85 US (5. 1%) Europe (-7. 7%) Japan (-7. 5%) EM (-13. 8%) -1, 5 80 янв фев мар апр май июн июл авг сен окт ноя -2, 0 2012 2013 US (15. 3) Europe (11. 9) Japan (12. 3) EM (10. 2) 2014 2015 2016 2017 2018 2
US Equity Valuations Are Still Somewhat Stretched Relative valuations have also come down. . . US Equity Prices versus Model-based Fair Values (as of Oct-29) …but remained somewhat elevated US Equity Prices versus Model-based Fair Values (as of Oct-29) 3500 Actual 3000 Weighted average fitted value Range of model estimates 2500 2000 1500 2015 2016 2017 2018 3
Market Volatility is Still Relatively Low …but remain compressed relative to model estimates Residual Risk Premia for US Corporate Bonds (Difference between the corporate spread and the default risk component; percent) US Equity Volatility: Market Implied versus Model-Based Forecast (Over different terms; percent) Model based 18 17 16 15 14 13 12 11 10 9 8 16 Market implied 14 12 10 US high yield US investment grade 8 6 4 2 0 0 6 12 Months 18 24 -2 2006 07 08 09 10 11 112 13 14 15 16 17 18 4
Commodity Prices May Add to Volatility Oil prices have recently dropped… …adding to concerns about a slowdown in the global output Brent Spot and Futures Prices Commodities and Manufacturing 550 90 80 58 500 70 450 60 400 50 40 350 30 300 20 2015 2016 Brent spot (lhs) 2017 2018 Brent (5 -yr forward, rhs) 250 2015 53 48 2016 2017 Commodities (lhs) 2018 Global PMI (rhs) 5
Loan issuance reached record highs in 2017… Highly leveraged loan deals have grown as a share of new corporate issuance in the U. S. and Europe … U. S. and European Leveraged Loan Issuance by Debt-to-Earnings Multiple (Percent of issuance) New-Issue Global Leveraged Loan Volume (Billions of US dollars) 900 800 US Issuers Non-US Issuers 700 80 70 60 600 United States 6. 0 x or Higher United States 5. 00 x– 5. 99 x CLO formation and loan fund growth remains robust US CLO Issuance and Bank Loan Fund Assets Under Management (Billions of US dollars) 140 120 Europe, multiple of 6 or more Europe, multiple of 5. 00 to 5. 99 100 CLO issuance (left scale) 220 Bank loan mutual fund and ETF AUM (right scale) 180 200 160 140 50 80 500 120 40 400 100 60 30 80 300 40 20 60 200 10 100 40 20 20 0 0 1998200020022004200620082010201220142016 05 06 07 08 09 10 11 12 13 14 15 16 17 18 0 0 02 04 06 08 10 12 14 16 18 6
- Slides: 7