Gov Sovereigns/Treasurys

A looming Fed rate hike will weigh on stocks over the coming weeks. One of the reasons cited for raising rates is the possibility that continued low interest rates are endangering financial stability. Historical evidence suggests that excessive financial deregulation, rather than lower interest rates, has been the primary cause of financial crises. In fact, easy monetary policy - to the extent that it leads to higher inflation and higher nominal interest rates - can actually enhance financial stability.

Disappointing ISM surveys could signal a growth consolidation.
That, in turn, would spur a correction in risk assets.

With recent comments strongly hinting that the Fed is on track for a rate hike in December, the dy-namics of the Fed Policy Loop make spread product appear extremely vulnerable.

The August payrolls report did not change our view that a Fed rate hike is likely in December, but not before that.

We reveal what our most-trusted leading indicators are predicting about the major economies, and end with a provocative conclusion.

Given the rising odds of another Fed move before year-end, and the uncertainty that additional easing can be delivered in Europe and Japan, we re-iterate our tactical call to maintain a below-benchmark duration stance.

Chair Janet Yellen's comments at Jackson Hole reinforce our view that a Fed rate hike is highly unlikely until December. The risk is that overbought equity and junk bond markets correct as an oversold dollar prices in a December move.

In August, the model outperformed the S&P 500 and global equities in both USD and local-currency terms. For September, the model increased its allocation to cash and trimmed its exposure to equities.

Investors are being forced into riskier asset classes by the TINA effect, but the gaping macro disequilibria makes it difficult for investors to see how we move back to equilibrium in a benign way. Monetary policy on its own is limited in its ability to soften the adjustment, but the good news is that the political pendulum is swinging toward fiscal stimulus.