- Westpac’s Financial Stress Index is rising at its fastest level since 2008.
- The rise is being driven by higher inter-bank lending rates and stock-market volatility.
- Westpac’s Head of Macro Strategy said the speed of the recent pickup was “unsettling”.
A measure of Australian financial stress is rising at its fastest level since 2008, according to modelling by Westpac.
And the bank’s Head of Macro Strategy, David Goodman, says such conditions are conducive to more downward pressure on the Australian dollar, with the RBA set to keep interest rates on hold for the foreseeable future.
Goodman said the tone on global markets has shifted from a synchronised global growth outlook to one of increased volatility and trade protectionism.
In addition, global financial conditions are tightening as central banks steadily withdraw monetary stimulus — a trend pointed out by the RBA in its interest rate announcement on Tuesday.
And that’s putting upward pressure on the short term rates that banks charge to lend to each other, known as the Bank Bill Swap Rate (BBSW).
“Where we are clearly seeing this play out is in our Financial Stress Index,” Goodman said.
“Australian Financial Stress has risen at fastest pace since 2008 as a result of the spike in BBSW, the flattening in the yield curve and widening credit spreads. Increasing volatility in stocks and foreign exchange has also contributed,” Goodman said.
Currently, “levels remain just below 2016 when China and oil concerns dominated markets,” Goodman said.
“However, the pace at which the index has spiked suggests we could soon be at levels of financial stress only bettered by the financial crisis period.”
Goodman attributed the rise in short-term rates to a number of factors — including the increased supply of US treasuries to fund government spending at a time when global central banks are reducing their bond purchases.
But among the various reasons cited, “none of them are completely satisfactory”.
“It seems clear to us that short rates are rising for reasons other than hawkish central bank outlooks or an assessed deterioration in bank credit,” he said.
“That said, the fact that such widening was last associated with the depths of the financial crisis is unsettling.”
Westpac’s index is based on a statistical analysis of components spanning Australian stocks, the AUD, as well as inter-bank lending rates and the yield spread on corporate bonds.
As this table shows, the recent pickup in financial stress has been driven by the rise in the BBSW together with the “striking under-performance” of Australian bank stocks.
“The rise in our Financial Stress Index is showing the recent tightening in financial conditions currently impacting the Australian economy,” Goodman concluded.
“The fact that this is happening at a time when domestic housing has peaked, global growth appears to have plateaued and trade tensions are rising, adds to the case for RBA to continue its extended period on hold. And as a trade sensitive bellwether, risks appear to a lower AUD.”