His advice is argued in part by the phenomenon of “residual seasonality.” They predict a drop in inflation and three rate cuts.
After the worst monthly drop of the year, Morgan Stanley urged to buy US public debt. “Even if the economy doesn’t falter, bond rates could fall sharply if inflation data disappoints true believers in hikes. Buy bonds,” wrote strategists Matthew Hornbach, James Lord and Andrew Watrous, among others, in a note to investors.
Their recommendation is due in part to the “residual seasonality”, a statistical quirk that is believed to influence economic data even after the usual seasonal adjustments have been made. After incorporating this phenomenon into the bank’s forecasts for personal consumption spending inflation, strategists predict a decline in inflation. inflation faster than the market discounts.
They foresee a rapid deceleration of annualized rates in three and six months of core PCE inflation. This, the bank’s strategists write, “should open investors’ eyes by the end of the year.”
How many times would rates fall according to Morgan Stanley?
These inflation readings could bring the market more in line with Morgan Stanley’s expectations. Its economists predict that the Federal Reserve to make three 25 basis point cuts this yearwhile swap traders discount approximately 50 basis points of easing.
It would also mean the market is pricing in a much more substantial easing cycle in 2025, as it is currently forecasting just over 75 basis points, they added.
US Inflation.jpg
The Economist
The inflation forecast
Morgan Stanley strategists are part of a group on Wall Street that has been surprised by its recommendations to buy US debt this year after a rise in bond yields.
They claim that inflation data from the Bureau of Labor Statistics and the Bureau of Economic Analysis from earlier in the year did not take into account “the seasonal spike in inflation,” which misled investors into predicting higher inflation. This has caused a decline in the bond market so far this year.
Morgan Stanley states that The existence of residual seasonality was also visible in labor costs, and in the period after the pandemic its presence worsened.
Although strategists recognize that the existence of residual seasonality in the past does not guarantee its presence in the future, its presence in so many price measures means that Investors are understandably confident that the pattern will continue next year.
Source: Ambito
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