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Dovish pivot?
Its already happened
All eyes on tomorrow’s Fed meeting with risky assets hoping for signs of a dovish pivot. But, to a large degree, the dovish pivot has already happened.

The chart below refreshes the Qi credit impulse which we introduced last October. That note details our methodology but, in short, Qi models include a range of macro factors that speak to the ease of obtaining credit, the availability of liquidity & overall financing levels.

All are in z-score terms looking at the rate of change (not absolute level) relative to trend. A lower (higher) number points to tighter (easier) credit conditions.

The initial Covid lockdowns produced a sharp contraction in credit impulse, but then Central Banks threw the kitchen sink at it & conditions eased back equally quickly.

The 2022 monetary policy tightening is also evident. Both the Fed & ECB took overall credit conditions 2 standard deviations below trend.

More recently though expectations for future rate cuts, lower real yields, narrower credit spreads, easier US Dollar liquidity & others have all contributed to the credit impulse easing back. In fact, in Europe we are back at trend. The US is slightly behind but there too financial markets have already done a fair amount of work removing the effects of policy tightening.
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Moreover, you could argue this snapshot under-represents the move in overall financial conditions. Qi does not include equity markets in our credit impulse measure, so there is no impact from any potential wealth effect accrued from October’s bounce in equities.

For policy hawks this creates a paradox. Dovish language tomorrow further removes the tightening of financial conditions needed to combat inflation.
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