Chart of the week: Ascending from the shadows

Callum Thomas

Topdown Charts

Shadow policy rates on the rise: Shadow policy rates are designed to factor in the effects of quantitative easing (QE). They present a view of the effective level of interest rates beyond the simple headline policy interest rate when QE is in force, and are especially useful when the headline rate is at the zero lower bound.

Comparing the shadow policy rate with the standard policy rate in the chart below we can see that below the surface the story is wildly different both with regards to previous easing, and now tightening...

Indeed, across Developed Markets the weighted average shadow policy rate has actually gone up +240bps from the low point. Hence in this respect it was only a matter of time before the vertical run in equities came to a pause.

It’s likely that we see this indicator move higher yet as QE programs are increasingly being halted, bond markets are adjusting upwards, and even headline policy rate hikes have begun (e.g. UK, Norway, NZ already: and the Fed, BOC soon). Thus as noted previously, monetary tailwinds are transitioning to headwinds.

Key point: The risk/return balance for equities has shifted as shadow rates rise.

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Callum Thomas
Head of Research
Topdown Charts

Callum is Head of Research at Topdown Charts. Topdown Charts is a chart-driven macro research house covering global Asset Allocation and Economics.

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