By: Editorial Team, StoneX Media
The U.S. deficit has grown by $3 trillion in a single year, and asset prices have moved higher rather than lower on the back of it. Fiscal and monetary alignment, meaning expansionary government spending arriving at the same time as a central bank unwilling to raise rates, is the condition lifting equities, gold and Bitcoin together rather than any story unique to one of them. That combination is rare because fiscal expansion has historically been met by a tightening Federal Reserve, which offsets it. What makes the current setup unusual is that inflation sits above the Federal Reserve 2% target and policy has still not turned restrictive.
James Stanley is a Senior Market Analyst at StoneX Media whose work centers on price action and macroeconomics across more than two decades spanning equities, options, fixed income and foreign exchange. He follows how monetary and fiscal policy shifts feed through to equity indices, precious metals and digital assets on medium-term time frames of roughly two days to two weeks.
"It's rare to see that degree of fiscal accommodation met with a monetary environment in which the central bank is not hiking rates, even with inflation well above their 2% target", Stanley says of the current policy backdrop. Fiscal and monetary alignment removes the usual brake on asset prices, because the spending that supports demand is not being offset by a higher cost of money. Specifically, that is why equities, gold and Bitcoin have advanced in the same window despite having little in common as assets. The practical consequence for anyone running cross-asset exposure is that these are not three separate trades but three expressions of one policy condition, which means they can also unwind together.
A $3 trillion increase in the U.S. deficit in a single year changes the arithmetic for fixed income before it changes anything for equities. The stated route out of that debt load is growth rather than austerity, and Stanley points to the repetition of that message from the White House and the Treasury, noting that "for a debt to GDP ratio, there's only two ways that that can happen, either massive austerity and lower debt or a massive growth in GDP". Growing out of the debt means growing earnings, which is why the fiscal story reads as supportive for stock prices and corrosive for bonds at the same time. Consequently, the deficit that underwrites the equity case is described as bringing "a very precarious risk to bonds and treasuries". For holders of duration, the risk is not a single policy event but the steady erosion of real return while inflation runs above target.
The alignment ends when holding a Treasury pays enough to compete with owning risk, and not before. Until yields reach that level there is no opportunity cost pulling capital out of equities, gold or digital assets, which is why pullbacks in stocks have kept resolving as pullbacks rather than reversals. Whether that threshold arrives depends far more on the fiscal path than on any single speech, and the fiscal path shows no sign of turning. As Stanley puts it, "I don't think that we're going to see austerity in the U.S. anytime soon".
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--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: James Stanley, StoneX Media Senior Market Analyst
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