Asset Price Volatility a Catalyst to Weakness in the Real Economy

Executive Summary: • Many economists expect poor data to precede financial market weakness under the framework that buoyant asset markets reflect economic strength, and benign indicators would imply a rise in volatility is far from imminent • Rising financialization has amplified the impact of non-bank financing on the real economy, for yield-seeking institutional investors depressed risk-free returns and “moved up the ladder” in duration, credit and liquidity risks • As monetary authorities turn to quantitative tightening, heightened asset price volatility would threaten entities reliant on non-bank financing, thus turning weakness in asset markets into a constraint on real economic activities