Kansas City Fed: Financial Stress Fell In May

Economic growth appears to be slowing, as recent indicators suggest, but the financial markets are keeping a stiff upper lip. Credit markets don’t look particularly anxious, at least not yet, and the same can be said for the stock market, despite its recent wobbles. Additional support for the bright side via markets arrived with yesterday’s update of the Kansas City Fed’s Financial Stress Index (KCFSI).

KCFSI, a monthly index of 11 variables measuring the level of “stress” in the U.S. financial system, fell to -0.52 last month, its lowest level since the Great Recession ended. The index measures a variety of credit spreads and other metrics, such as the correlation of performance between the stock market and Treasury securities. A negative reading for the index indicates that financial stress is below the long-run average. The lower the number, the lower the stress, or so this index advises. By that standard, there was slightly less stress in the financial markets in May vs. April.

Reading through economic reports in recent weeks might suggest otherwise. The sharp slowdown in job creation in May, in particular, raises warning flags. But the markets don’t necessarily agree. The question is whether the markets or the economic numbers are dispensing misleading clues about the future?
Sooner or later, one side is going to surrender its position and recognize the wisdom of the opposing view. The next installment on figuring out which side’s likely to cry “uncle” first arrives shortly with this morning’s update of weekly jobless claims in the U.S.