Morgan Stanley Fixed-Global Macro Commentary August 22-109977136

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Global Macro Commentary | North America

August 22



Alexandra Maier



 ! "#$#$%&#'()$*

+,-."

Dominic J Krummenacher



/!01!2 ! "))$(%)$3'4%*#



Lenoy Dujon

567!

 /18 ! "#$#$%&#'$%%4

+,-."

Lorenzo Testa



9: ! "))$(%&%%'(;;%

5<=.>,,?@A"

Hiroki Yagi

B!2!

CDE# 1F! "*#;&*;&'3)#$

?,,G,A"

Min Dai



/ ! "*3$$$;4'%4*;

USTs bear-flatten ahead of Chair Powell's speech; Bunds sell off

amid mixed data in the euro area; UK is an outlier with strength

in manufacturing PMI; Fedspeak pushes back against a 50bp

September cut; BoK on hold; NOK weakens after miss in 2Q

GDP; DXY at 101.52 (0.5%); US 10y at 3.852% (+5.1bp).

•bear-flatten following

, in-line, and an upside surprise in 

 !"despite underlying PMI details showing less strength.

•#$ in Europe sends %&'~5bp higher across the

curve amid mixed Europe data, with broadly higher-than-expected

 !"coupled with weaker &&(!"and a

slowdown in)*)+&(.

•,rise (10y: +7bp) and ,%!outperforms its European peers by

ending the day flat as the UK becomes an outlier compared to the US

and euro area, with its &&(!" showing strength and

rising once again.

• Fedspeak pushes back against a 50bp September rate cut, with

-'!''needing more data before cutting,

%'!'supporting easing policy “gradually,”

and !'.'!'/saying he is not yet in the

“25bp or 50bp camp.”

• The %-holds its policy rate steady but strikes a dovish tone as it

lowers its inflation and growth forecasts and%-, #

notes that four board members are open to cutting rates in the next

three months;- rally, outperforming broader AxJ market.

•0-(-1.0%) underperforms G10 peers following a downside growth

surprise in0)*)+,1!,showing an economy that is a touch

weaker than the Norges Bank expected.

Please refer to our recent publications and collaborations (BoK Review: Dovish Dot

Plot Serving The Role of Dissenting Votes).

1 .'

United States:

Global duration broadly sold off, US equities fell, and USD strengthened as market

participants awaited a notable session on Friday, with commentary from BoJ

Governor Ueda at the Diet and a speech from Fed Chair Powell at the Jackson Hole

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investors should be aware that the firm may have a conflict of

interest that could affect the objectivity of Morgan Stanley

Research. Investors should consider Morgan Stanley

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For analyst certification and other important disclosures,

refer to the Disclosure Section, located at the end of this

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+= Analysts employed by non-U.S. affiliates are not registered

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and may not be subject to FINRA restrictions on

communications with a subject company, public appearances

and trading securities held by a research analyst account.

August 22, 2024 10:25 PM GMT



Economic Symposium. Markets are focusing on whether Ueda will maintain his

hawkish stance, as he had previously suggested an additional rate hike, and whether

there will be guidance from Powell on the pace or magnitude of cuts likely to come.

USTs steadily ground cheaper with a handful of catalysts. In the euro area, PMIs

were somewhat mixed but broadly showed strength in services while manufacturing

remained on the weaker side. The upside surprises in France and the euro area

pushed European bond yields higher and supported the cheapening in USTs early in

the NY morning. Data in the US also somewhat supported the move higher in yields,

as headline values showed some strength while underlying details were a bit more

downbeat. Jobless claims came in line with consensus expectations; new home sales

rose for the time in five months; and the Kansas City Fed Manufacturing Index, which

unlike most regional surveys had correctly signaled the weakness in ISM last month,

rebounded (through remained weak) in August.

US PMIs were also a bit of a mixed bag. The S&P Global Composite PMI surprised to

the upside, driven by a beat in Services PMI, which expanded further. The data

showed business activity in the US remained robust, which helped to alleviate

imminent recession fears. Inflation data within the survey also showed it continues

to slow. However, Manufacturing PMI fell further into contraction territory as

output declined at the fastest rate for 14 months. The release noted that the

“manufacturing sector’s forward-looking orders-to-inventory ratio has fallen to one

of the lowest levels since the global financial crisis,” which makes the "soft-landing"

scenario look “less convincing.” Additionally, employment metrics in the survey fell

for the first time in three months with the cooling job market in the manufacturing

sector, driven by “growing concerns about the business outlook.”

Despite the bleaker underlying details, USTs seemingly reacted to the beat in the

headline figures and continued to sell off. Commentary from FOMC members also

weighed on the market as it pushed back against the probability of a 50bp rate cut

in September. Kansas City Fed President Schmid was seemingly the most hawkish of

the speakers on Thursday as he cautioned that the economy could still see a

demand pickup if the Fed is not careful, and added that he needs to see more data

before being in favor of cutting rates. Boston Fed President Collins said she believed

it will be appropriate to ease policy soon, but supported a “gradual” pace.

Philadelphia Fed President Harker struck a similar tone to Collins and said that while

he supports a September cut, he is not yet in the camp of 25bp or 50bp cuts as he

needs more data.

Following the Fedspeak, STIR pricing slightly lowered the probability of a 50bp rate

cut in September to ~25% (P: 38%). Additionally, ~8bp of cuts in 2024 were priced

out, with ~95bp of cumulative cuts priced in through the end of the year.

Risk-off sentiment ahead of Fed Chair Powell’s speech at the Jackson Hole Economic

Symposium on Friday weighed on US equities. The S&P 500 fell -0.9%, with the

technology sector leading the losses.

Japan:

Early in the Tokyo morning, short- to medium-term 2,%began to sell off. With

higher domestic stock prices and steady USD/JPY, markets seemed to be pricing in to



Morgan Stanley Research 3

some extent an additional BoJ rate hike ahead of BoJ Governor Ueda’s testimony on

Friday. After a slightly weak TAP auction for the 5-15.5y sector, short- to medium-

term JGBs continued to sell off, and the curve twist-flattened into Tokyo close.

Meanwhile, the long end outperformed on the curve and accelerated its rally into

Tokyo close, supported by strong demand. Ultimately, the JGB curve twist-flattened;

2y JGB sold off 1.0bp to 0.355%, 20y JGB rallied 1.5bp to 1.685 %, and 30y JGB

rallied 2.0bp to 2.06% on a simple yield basis. TONA-OIS curve also twist-flattened

and underperformed JGBs especially in the longer end. XCCY basis tightened on

broad sectors especially in the longer end.

Ahead of Ueda’s speech on Friday, 132!4 traded choppily in a range of 144.85 to

145.75, and failed to break meaningfully below the 145.00 mark. In the London

morning, ,%!32!4 moved higher toward 191.10 in response to the steady UK

preliminary PMI data release.

Europe:

,%!, which saw demand on the back of strong UK PMIs offset its otherwise high

sensitivity to equities, outperformed its European peers and was up marginally on

the day. Similarly, for safe-haven /, the risk-off sentiment and higher US yields

roughly balanced out, keeping the currency flat on the day. 0-was one of the

G10’s underperformers, falling -0.8% on Thursday, dragged down by a downside

surprise in Norway's 2Q24 GDP. 5- fared only marginally better at -0.6%. The EUR

started the London session slightly on the back foot with mixed readings from euro

area PMI constituents but a material step down in 2Q24 negotiated wage growth.

However, ultimately, 5#closed -0.4%.

Despite the mixed preliminary PMIs, which showed higher services and weaker

manufacturing, a risk-on tone dominated the price action during the London

morning. European equities were higher and the67%&' erased all its gains from

Wednesday’s trading. The stronger PMIs in the US, combined with in-line jobless

claims, pushed 10y Bund yields another 2bp higher likely due to unwinds given the

long positioning at present. The 10y Bund ended the day at 2.42% (+5bp d/d) and

underperformed on a cross market basis.

At the very front end of the market, the curve moved higher almost in a parallel

fashion across Euribor packs, and overall pricing remained stable during the day. The

curve exhibited a mild bear-steepening as opposed to the bear-flattening witnessed

on the US curve.

Moving to the cash curve, long-end France curve steepened on the 10s30s box

versus Germany during the London morning, likely driven by some idiosyncratic

flows as other EGB curves moved in the other direction at the back-end of the

curve. Conversely, credit spreads stayed resilient during Thursday’s sell-off, and both

%!3%&' and 83%&' closed flat at the end of the trading session.

Dollar Bloc:

Higher US yields combined with a weak risk sentiment as evidenced by a fall in US

equities gave the USD a strong bid across G10 FX. In the antipodeans, 81was

down -0.6% and 091was down -0.4%. 81only yielded -0.1%, as market

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MGlobalMacroCommentary|NorthAmericaAugust22AlexandraMaier!"#$#$%&#'()$*+,-."DominicJKrummenache...

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