QI TAKEAWAY — Financial market fear has fed economic fear in the post-pandemic episode. There may be limits to how tight the Fed can go given how closely these two fear gauges have come to co-move.
- From its September low of 32, the MOVE has more than doubled to 76 and has remained over 70 since October; however, save for Fed chair uncertainty, which spiked the VIX above 30, equities’ fear gauge has oscillated around the stable 20-mark for most of the last year
- When the VIX is lagged by one month, its rolling two-year correlation with UMich Higher Unemployment Expectations rises significantly vs. concurrently; in the 24 months ended January 2022, the lagged correlation is a stout 0.86 while the concurrent is a weaker 0.5
- Correlation between the VIX and UMich’s Higher Unemployment Expectations typically rises during economic stress, as was seen in the prior two cycles; should Fed tapering tighten financial market conditions via the multiplier, fear may also transmit into the real economy