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First Cut: St. Louis Fed Financial Stress Index showed financial markets not yet worried about COVID-19 through February 21

The St. Louis Fed’s Financial Stress Index rose marginally to -1.594 in the week ended Friday, February 21 after the record low of -1.603 in the prior week.  A dip in stock markets from the prior week hardly registered as a cause for concern. However, early this week stock markets’ worries about the spread and impacts of COVID-19 kicked in in earnest and are likely to bring those record low readings back up. Flight-to-safety caused Treasury yields to decline and the gap between 3-month bills and 10-year notes was negative for the first time since mid-October 2019. However, it stayed positive for the gap between 2- and 10-year notes, which is what the FOMC pays more attention to. If the stress index does start to rise — and it could be sharp — this should not be read as a stressful environment, but rather one that is on alert while enjoying generally healthy conditions.

 

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