Morgan Stanley Fixed-Global Macro Commentary February 5-106359024.pdf

MUpdate2setthetoneforaweaksessioninriskmarkets.Powellreiterateditis“notlikelythatthiscommitteewillreachthatlevelofconfidenceintimefortheMarchmeeting”tobeginratecuts.Hefocusedonweighingtheriskofmovingtoosoonagainsttheriskofmovingtoolate.Giveneconomicgrowthata“solidpace,”astronglabormarket,andcontinueddeclinesininflation,hesaidtheFedcan“reduceinterestratescarefully.”TheUSTcurvemovedinabear-flatteningmannerthroughouttheovernightsessionuntiltheNYmorningwhenhighgradecorporateissuanceannouncementsmaterialized,withlonger-datedtenorsincludedinguidance(10borrowerscombinedtoprice$18.1bn).Anop-edfromMinneapolisFedPresidentKashkari,whichalludedtothepossibilitythattheneutralratehasincrease,alsoweighedonthelongend.Kashkaricitedtwosignificanteconomicdevelopmentssincehislastpublications:(1)amorerapidthanexpecteddeclineininflation;and(2)remarkablyresilienteconomicgrowth.Hesuggestedthatinsteadofmonetarypolicydoingtheheavyliftingtobringdown,itappears“supply-sideincreasesareboostingoutputandbringingsupplyanddemandintobalance,thusreducinginflation.”Hecitedtheresilienceofdatainmoretraditionalinterest-rate-sensitivesectorsoftheeconomy(i.e.,housing)ledhimtoquestionhowmuchdownwardpressuremonetarypolicyiscurrentlyplacingondemand.Inhisview,theconstellationofdatasuggeststhecurrentstanceofmonetarypolicy(usingthe10yTIPSyield)maynotbeastightasinthepre-pandemiclowneutralrateenvironment.Kashkarithensuggesteditispossible,atleastduringthepost-pandemicrecoverythat“neutralhasincreased.”Theprevailingmovesacrossmacromarketsbecamemoredefinedalongsidethe10:00amETreleaseoftheJanuaryISMServicesIndex.Economicactivityintheservicessectorexpandedforthethirteenthconsecutivemonthastheheadlineindexroseto53.4(C:52.0;P:50.5).Keydriversoftheriseintheheadlineindexwerelargereboundsintheemploymentandpricespaidsubindices.Theemploymentindexreturnedintoexpansionat50.5(C:49.4;P:43.8)andretracedthesteepdeclineinthepriormonth.Respondentscommentedon“rampingupheadcountasprojectscomeonline.”Thepricespaidindexroseto64.0(C:56.7;P:56.7),thehighestreadingsinceFebruary2023.ISMChairNievesattributedthelargestm/mincreaseinpricessinceAugust2012tohighershippingcostsandacross-the-boardincreasesincommoditiesandservicesprices.Respondentsspecificallynotedthe“transportationimpactsoftheSuezCanal,duetounrestintheRedSeaandtheissuesatthePanamaCanalareimpactingbothcostsandschedulesforthetransportofglobalgoods.”Afteradditionaldata,whichreducedoddsforan“unexpectedweakening”inthelabormarketandindicationsofamorepersistentstallinthecoregoodsdeflationtrend,STIRmarketscontinuedtoreducethenumberofratecuts(-113bp)pricedinthisyear.Thebelly(5yUSTs:4.12%,+13.6bp)underperformedinthedouble-digitsell-offacrosstheUSTcurveasintermediateforwardsrepricedhigher.Thesell-offinSFRZ5(+14bp)impliedfedfundstobe~3.50%byDecember2025.MUpdateMorganStanleyResearch3FewerimpliedFedratecutsandasell-offinUSrealratestranslatedtowidespreadUSdollarstrengthagainstpeersintheG10.Infact,theDXYUSDIndex(+0.5%)closedatitshighestlevelsincemid-November.USDdisplayedthemostpron