The synchronized global fiscal impulse (chart 1) looks set to reverse in the coming months. This fiscal drag will prove a significant challenge for the prevailing reflation macro narrative.

Steepers, dollar shorts, and long RoW equities vs US all look very vulnerable imo 1/

The majority of income subsidy and loan guarantee programs announced by gov'ts will be phased out, or in some cases end entirely, this fall (chart 2).

Even with transition policies in place, its unlikely the fiscal support will be anywhere near where it was earlier this year. 2/

Over the next 3-9 months, the global fiscal impulse looks set to turn into a material fiscal drag.

The latest June IMF WEO projects a staggering 8% tightening in the fiscal balance of AEs next year (Chart 3). 3/

There are some scenarios that would alleviate the growth impact of this fiscal drag. First, a sustained rebound in private sector employment could fill the gap from the loss of income support. 4/

While possible, this upside scenario seems like an enormous leap of faith once one takes into account the magnitude of income support gov'ts have provided.

Take the US. Since the start of 2020, gov't transfers have accounted for >200% of the growth in real disposable income. 5/

The scale of this support underlines how imp it is to get this policy transition right.

Unf the tea leaves from congress, and other DM govt's, suggest the appetite for further aggressive fiscal push is just not there. 6/

Im skeptical that even a blue wave in Nov could meaningfully alter this trajectory. The scale of US fiscal support has been so large that its nearly impossible not to avoid some degree of tightening next yr. Moreover, Biden's current eco plan is far from the Green new deal 7/

What will the fiscal drag mean for markets?

My guess is investors will soon question the ability of the reflation narrative to survive a global synchronized fiscal headwind. Popular recovery traded (steeper curves, weaker USD, long RoW vs US) are likely to suffer 8/

Of course, timing is always paramount. Blindly fading a strong trend is a recipe for disaster in trading. Rn there are few strong signs the reflation narrative is fading.

The dollar has continued to weaken and US curves have remained steep (save yesterday) 9/

I am watching the bbdxy for signs that the reflation narrative is starting to abate.

A close above the July 3rd highs would suggest that the consolidation in the USD from the March highs has completed and that its primary uptrend has resumed imo. 10/

My plan is to trade w/ long USD bias if this pattern is confirmed.

For good order, I've gotten my *ss handed to me last two months trading, so if anyone would likes reverse indicators, this thread should give you more confidence that the reflation trade probably continues. END