One of my favorite indicators of financial market stress is Corporate bond spreads. The premium charged on the lowest level of investment-grade corporate bonds, over the equivalent 10-year Treasury yield, is a great measure of the level of financial market stress.
Levels below 2 percent — not seen since 2004 – 2007 and 1994 – 1998 before that — are indicative of a raging bull market. The current level of 2.24 percent is slightly higher, reflecting some caution, but way below elevated levels around 3 percent.
The Financial Stress Index from St Louis Fed measures the degree of stress in financial markets. Constructed from 18 weekly data series: seven interest rate series, six yield spreads and five other indicators. The average value of the index is designed to be zero (representing normal market conditions); values below zero suggest low financial stress, while values above zero suggest high market stress.
Current levels, below -1, also indicate unusually low levels of financial market stress.
The Leading Index from the Philadelphia Fed has declined slightly in recent years but remains healthy, at above 1 percent.
Currency in Circulation
Most recessions are preceded by growth in currency in circulation falling below 5 percent, warning that the economy is contracting.
Current levels, above 5 percent, reflect healthy financial markets.
On the other side of the Pacific, currency growth is shrinking, below 5 percent for the first time in 7 years. A sustained fall would warn that the economy is contracting.
Further rate cuts, to stimulate the economy, are unlikely. The ratio of Household Debt to Disposable Income is climbing and the RBA would be reluctant to add more fuel to the bonfire.
There is no immediate pressure on the RBA to raise interest rates, but when the time comes the impact on the housing market could be devastating.