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U.S. Economy: Desperate For Fiscal Steroids


Latest macro releases point to a downturn of the US business cycle.

Interest rate hike expectations adjust abruptly downwards.

The need for a new generation of highly targeted fiscal stimuli will eventually become a top priority as monetary policy tools lose their effectiveness.

Bear steepening moves in US Treasuries could come in anticipation of a new wave of supply.

Last week's releases had us glued to our screens as we were waiting to see if the Q3 business cycle would accelerate, essentially paving the way for an interest rate hike. This, however, was not the case. The plummeting of both manufacturing and services ISM indices, for the month of August, exposed just how weak the US economy is, and put a lid on any chatter about imminent rate hikes. With less and less ammunition left in its arsenal, the Fed alone cannot fight off a recession, making fiscal policy actions an unavoidable path. For these fiscal policies to work though, a new generation of highly targeted fiscal stimuli will need to be implemented as the one-size-fits-all model used in the past will not be able to reverse the productivity slump and rejuvenate demand beyond the short-term cycle. The US economy is in need of some serious fiscal steroids aimed at its biggest structural issues and capable of boosting its manufacturing base. This, of course, will be a subject for intense political discussion in the months to come with any actual initiatives to be expected after the US elections. Politics aside, financial markets are already beginning to turn their attention to the need for fiscal action, and this has direct implications for US equities (NYSEARCA:SPY), US bonds (NYSEARCA:TLT) and of course the US dollar (NYSEARCA:UUP).

Investment Implications

Equity markets are expected to benefit from...