At -1.166 in the October 4 week, the St. Louis Fed’s Financial Stress Index was the least comfortable it has been since -1.103 in the February 15 week when signs of an economic slowdown were compounded by the partial federal government shutdown and yet another contentious negotiation over funding and raising the debt ceiling. Markets responded to some concerning economic data and discouraging geopolitical news with a flight-to-safety. It cannot be said that markets are in distress, but they are definitely less complacent.
On the plus side for the economic outlook, the 2-year/10-year notes yield spread was the widest it has been in nearly two months, but it is far from the short of gap that attends healthier economic conditions. The spread between the 3-month bill and 10-year notes remained negative for a tenth week and was unchanged from the prior week. Fed policymakers tend to pay more attention to the 2-year/10-year yield spread, but as the minutes of the September 17-18 FOMC hinted, the inversion in the yield curve is not being ignored.
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