Economy

Conditions are falling into place for inflation to plunge and monetary easing to progress rapidly. This in combination with structural reforms creates a bullish backdrop for Argentine financial markets. The current economic, structural and political configurations look more promising for Argentina than Brazil. Go long Argentina/ short Brazilian sovereign credit, overweight the Argentine bourse versus the Frontier Markets benchmark and, go long the Argentine Peso versus the Brazilian <i>real</i>.

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

The dollar is likely to enter the bubbly stage of its bull market within the next 12 months. The key culprit for this move will not be the Fed, but easing by non-U.S. central banks. The euro area economy could enter a temporary soft patch, but this will not result in an imminent easing by the ECB.

The neutral real rate of interest, r*, is likely to remain depressed for the foreseeable future. The Fed is likely to take additional incremental measures to boost long-term inflation expectations, including allowing inflation to overshoot its 2% target more frequently. This should be enough to keep long-term Treasury yields on a gradual upward trajectory.

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

Recent shifts in the Fed's policy stance are bullish for the dollar, negative for commodities and emerging markets, and positive for assets with a yield. They also suggest risk assets will continue to perform decently.

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.

The equity rally has been in a holding pattern, with some tactical fraying around the edges.

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.