Halister News

(Bloomberg) -- While the Fed is more likely to raise rates again in September, it could go sooner if there’s a “meaningful” drop in the unemployment rate and higher inflation than currently projected, Morgan Stanley economists and strategists led by Ellen Zentner, Matthew Hornbach wrote in note Friday.

• Morgan Stanley reaffirms its November forecast for two rate hikes in 2017, in September and December; sees unemployment rate fluctuating ~4.8% in near term, YoY growth in core PCE to remain “under pressure” in early 2017
  • Even so, raises possibility that its forecasts on unemployment, inflation could turn out wrong
• Two factors that could force Fed to move as early as March are higher readings on core PCE inflation, “meaningful undershoot” of NAIRU
  • Both developments could lead to shift that makes Fed less willing to let pressures build
• UST market isn’t priced for a March hike, is fully prepared for one in June; market could sell off further if data encourages Fed to act in March
  • March hike would still be consistent with “gradual” removal of accommodation
• Policy-sensitive rates now offer enough protection to consider longs, should perform “very well” even if Fed doesn’t move in March
• Market’s misread of average hourly earnings data presents opportunity to overweight 2Y-5Y sector of UST curve