Since the Fed tapered its QE program, the US economy and markets have come under pressure. Major equity indices have trended sideways; the yield curve has flattened; implied inflation has fallen to multi year lows and cyclically sensitive parts of the economy have deteriorated (e.g. manufacturing, trade & capex cycles). In recent weeks, hawkish language from Fed governors has rapidly brought forward the timing of rate hikes. The key question therefore is whether the Fed is beginning to overtighten? At its core, the US economy appears robust: The service sector is expanding; job creation is reasonable; wage growth is picking up and housing data is mostly improving. At the edges of the economy, though, there are signs of fraying: The corporate sector, which leads the economic cycle, has become increasingly overstretched. As such, it’s vulnerable to tighter monetary policy from the Fed (and/or a macro shock): Profit growth is poor; leverage is rising; and the ‘financing gap’ is back at recession warning levels. Read more: (VIEW LINK)