Morgan Stanley Fixed-Global Macro Commentary August 21-109962039

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Global Macro Commentary | North America

August 21

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Alexandra Maier



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Zoe K Strauss

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Lenoy Dujon

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Hiromu Uezato

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Min Dai

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FOMC minutes show "several" members supported a July cut;

large downward revision to US payrolls; USD weakness sends

GBP and EUR to YTD highs; JGBs bull-flatten; miss in South

Africa CPI supports front-loading cuts; BI and BoT on hold; DXY

at 101.17 (-0.3%); US 10y at 3.801% (-0.6bp).

•twist-steepen as reveal that the FOMC was

close to cutting rates, with “several” members seeing a plausible case

to cut rates in July and the “vast majority” of participants expecting to

cut rates in September if economic data continue to come in as

expected.

• A unexpected delay in the

 causes choppy price action, but the data

ultimately show a larger-than-expected downward revision of -818k,

signaling that the labor market was not as robust as it initially

seemed.

• Continued weakness in the USD (!"#!$%&: -0.3%) as yield

differentials move away from the USD’s favor pushes '((+0.4%)

and )*(+0.2%) to fresh year-to-date highs.

• Slightly weak +initially send JBGs higher, but

demand especially for the super-long sector prevails and the '

curve ends up bull-flattening (2s20s: -2bp d/d).

• A downside surprise in ,+($spurs a rally across the

South African yield curve (-.: -14bp) and sends /,*(-0.3%) lower

as market participants increasingly price in front-loaded rate cuts.

•$!*and 0weaken after the and the $keep policy rates

unchanged at their August meetings, but offer dovish forward

guidance, with the BI noting that there is room to cut rates in 2024

while the BoT offers a warning on potential economic slowdown.

Please refer to our latest Global Macro Strategist (Did 'Sahm'-one Say Recession?) as

well as our recent publications and collaborations (Global Macro Data: US Liquid

Rates Tracker; Global Macro Data: Japan Macro Data Tracker - 2024/08/21; Global

Macro Data: UK Rates Monitor - August, 21, 2024).

! %1

United States:

The case for a September Fed rate cut continued to get stronger with dovish FOMC

Morgan Stanley does and seeks to do business with

companies covered in Morgan Stanley Research. As a result,

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

Research as only a single factor in making their investment

decision.

For analyst certification and other important disclosures,

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

report.

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

with FINRA, may not be associated persons of the member

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 21, 2024 10:35 PM GMT



minutes and material downward revisions to US payrolls. This supported global

duration and a weakening of the USD as yield differentials continued to move

against the USD’s favor.

The NY morning consisted of some choppy price action ahead of the BLS

preliminary estimate of the annual revision to payrolls. With the official BLS release

of the revisions unexpectedly delayed due to technical difficulties, market

participants were left speculating on the value, which resulted in jittery moves in

both the US Treasury and equity markets. Eventually, the official BLS release

showed a preliminary downward revision of -818k, which was on the larger end of

market expectations and above our economists' forecast of a -600k revision. This

revision translated to a -0.5% reduction. Our economists note that most revisions

are in the order of 0.1–0.3%, making this the largest downward revision since 2009,

which was revised down by -0.7%. While the revision does not tell us about current

growth as the data inputs were through March 2024, it does show that the labor

market may not be as robust as previously expected. The revisions leaves payrolls

with an average 168k per month increase, which is not particularly slow, but a

noticeable step down. It further signals that the labor market data will be closely

watched for any signs of weakness.

USTs rallied as market participants digested the large downward revisions. USTs

managed to maintain their gains heading into the NY afternoon and into the 20y

auction. The 20y UST auction was digested smoothly even with the rally and was

nearly on the screws with a cut-off yield of 4.16%, just 0.1bp through the when-

issued yield. The increased allotment to direct bidders at 19.3% (P: 14.3%) mostly

offset the fall in allotment to indirect bidders to 71.0% (P: 77.2%), which left primary

dealers with 9.7% (P: 8.5%). Following the auction, USTs continued to hold their

gains ahead of the release of the FOMC minutes.

Minutes from the July FOMC meeting contained several dovish undertones as they

signaled that the FOMC was close to cutting rates in July and also solidified the case

for a September rate cut. The minutes showed that “several” participants thought

the recent progress on inflation and increases in the unemployment rate provided a

“plausible case” for a 25bp cut in July. Further, the “vast majority” of participants said

it would likely be appropriate to ease policy in September assuming the data

continued to come in about as expected.

Regarding the outlook, upside risks to inflation were seen as “having diminished,”

while downside risks to employment were seen as “having increased.” Moreover,

participants noted that the inflation and employment objectives continued to move

into better balance and a “couple” of participants viewed the risks “as more or less

balanced.”

On inflation, participants recognized the further progress toward the Committee’s

2% inflation target, noting the recent progress on disinflation was “broad-based

across the major subcomponents of core inflation.” Further, “almost all” participants

observed that the factors that contributed to disinflation would likely continue to

add downward pressure to inflation in the coming months.

In discussion of risks, a “majority” of participants noted that risks to the employment

goal had increased. This is opposed to the June SEP where only four participants saw



Morgan Stanley Research 3

upside risks to the unemployment rate. However, a “few” participants flagged that

“an easing of financial conditions could boost economic activity and present an

upside risk to economic growth and inflation.” This will likely be one of the

arguments against a rate cut in September that is larger than 25bp, as it could lead

to that easing of financial conditions. That said, “many participants noted that

reducing policy restraint too late or too little could risk unduly weakening economic

activity or employment.” This could be an argument for a rate cut larger than 25bp,

as some participants may believe in retrospect that the FOMC is easing policy later

than they should have.

On funding markets, FOMC staff continued to assess that conditions in US short-

term funding markets “remained stable” with “typical” dynamics observed around

quarter-end. There was no indication in the minutes that repo movements in the

inter-meeting period were viewed as out of the norm. Additionally, the staff

projected that overnight RRP usage would decline more noticeably over the

remainder of the year as issuance of T-bills increases, which is consistent with our

short-duration strategists' view for a downtrend in RRP balances. Overall, the SOMA

manager continued to assess reserves remained “abundant” and our strategists note

that this reserves assessment does not imply an imminent end to QT due to money

market conditions.

US Treasuries continued to bull-steepen through the release of the July minutes

given that they further solidified a September rate cut. Heading into the close, USTs

pared some of the gains and ended the day off session highs, with 30y yields pushed

into the red. Overall, the Treasury curve twist-steepened (2s10s: +5bp d/d) into the

NY close. STIR pricing added marginally more cuts for 2024, but overall was little

changed as market participants were already pricing in a September rate cut, and

the minutes added little clarity on whether the cut would be larger than 25bp.

Market pricing implied ~35% probability of a 50bp rate cut.

The dovish minutes and large downward payroll revisions were also supportive of

US equities, and the S&P 500 rose +0.4%. Better-than-expected earnings from

certain retailers supported consumer discretionary stocks, which outperformed and

led the gains in the index.

Downward revisions to US employment growth may have weighed further on the

already bleak demand outlook for oil. Brent crude oil futures fell another 1.5% and

closed at their lowest prices since the start of the year.

Japan:

In the Tokyo morning session, 'yields traded lower along with the rally in USTs

overnight, and JGB futures outperformed. Short- to medium-term sectors largely

traded in a narrow range ahead of the scheduled BoJ JGB purchase operation in the

1-3y, 3-5y, and 5-10y sectors. The results were a bit weak especially in the 5-10y

sector, as its auctioned yields were slightly higher than the yields traded in the

Tokyo morning session. Following the purchase operation, JGBs temporarily sold off.

However, demand at for the higher yields supported JGBs and pushed back against

the sell-off. The super-long sectors continued to outperform into Tokyo close. The

JGB curve bull-flattened; 2y JGB rallied by 1.0bp to 0.345%, 10y JGB rallied by 2.0bp

to 0.865%, and 20y JGB rallied by 3.0bp to 1.7% on a simple yield basis. TONA-OIS

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MGlobalMacroCommentary|NorthAmericaAugust21AlexandraMaier!"#$#$%&#'()$*ZoeKStrauss+,...

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