Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

We're navigating an economic landscape where government deficits act as a catalyst for private sector growth. The inescapable deduction is that monetary policy will likely remain restrictive for an extended period to counterbalance these deficits. This dynamic foreshadows heightened near-term economic expansion, stubbornly elevated inflation, and higher interest rates. As we embarked on 2024, Fed fund futures projected a cumulative 7 rate cuts by year's end, yet the trajectory now points to a solitary cut. Equity markets appear to have underestimated this evolving reality.

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In contrast to the sluggish and variable transmission of monetary policy, fiscal stimulus wields an immediate impact on the economy. Deficit spending essentially translates to income for consumers and businesses. The government injects funds into the economic cycle and subsequently recoups a portion through taxation. Deficit spending isn’t free of course, the annual interest expense on U.S. debt did reach $1 trillion this month.

Looking ahead, geopolitical stresses and climate change imperatives are poised to amplify deficit spending, potentially buoying risk assets. The decisive question revolves around the trajectory of monetary policy. Currently, central banks are signaling their aspiration for a soft landing. However, with inflation persisting, this calculus is shifting, diminishing the probability of a smooth economic transition. The market has a way to go to price in the incrementally restrictive monetary policy before we reach equilibrium again of monetary versus fiscal effects.

Learn more about the Market Situation Report written by Tier 1 Alpha.

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