The St. Louis Fed’s Financial Stress Index slipped to -1.268 in the week ended June 28, its lowest since -1.348 in the May 3 week. A continued sense that the Fed would impose a rate cut at the July 30-31 meeting helped soothe markets in the face of uncertainty about trade policy, sluggish global conditions, and geopolitical tensions. However, that reading was in advance of the strong Employment Situation report released on July 5 which shook the solidity of expectations for a rate cut.
The index would have to rise significantly before anything like genuine signs of stress emerged, but it is still clear that markets are particularly sensitive at present to anything that looks like a harbinger of an economic downturn. That would include the recent persistence of an inversion of the 3-month/10-year Treasury yield curve, although the 2-year/10-year curve has not inverted and is more closely watched by Fed policymakers.
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