The St. Louis Fed’s Financial Stress Index rose to -1.179 in the August 16 week, the highest since -1.178 in the February 22 week at the time when markets were still sorting out the implications of the prolonged partial federal government shutdown and adjusting to evidence of slower economic activity.
It would be a gross exaggeration to say that financial markets are exhibiting signs of stress, but the index does reflect that conditions are more volatile and fears of a recession are heightened with a consequent flight to safety in investments. US Treasury yields have fallen sharply in the last few weeks. It is good news for borrowers, but also a symptom of reluctance to engage in activities that support the economy. The inversion of 3-month/10-year yields has now dragged on for nearly three months with little relief. The more significant spread between 2-year/10-year yields has narrowed steadily for the past four weeks and is on the cusp of going negative for the weekly average.
Stresses are likely to build in the absence of some good news about trade policy and credible soothing rhetoric from policymakers.
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