Morgan Stanley Fixed-Global Macro Commentary August 19-109929005

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Global Macro Commentary | North America

August 19

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Alexandra Maier

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Zoe K Strauss

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Hiromu Uezato

6!7!

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Min Dai

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USD/JPY falls ahead of speeches from Fed's Powell and BoJ's

Ueda; USTs twist-flatten in thin liquidity session; Fed's Kashkari is

open to September cut; AxJ FX advances with THB

outperforming; EGBs trade in a narrow range; global equities

gain; DXY at 101.87 (-0.6%); US 10y at 3.871% (-1.1bp).

• Withand set to speak later this

week, which could lead to a repricing of the BoJ policy path, 

falls -1.9% during the Tokyo session, seemingly weighed down by

expectations for future rate differentials.

•modestly twist-flatten in a thin liquidity session as market

participants await further guidance from Fed officials, with  

!"#set to be released and the$%&'$!$

(!)"!later this week.

• US STIR pricing is little changed even though )

#*% says he is open to a September rate cut as the

“balance of risks has shifted” away from inflation and more toward

labor given that the labor market is “showing some concerning signs.”

•+%,#!#leads to advances in AxJ currencies; &

outperforms peers, gaining 1.8% against the USD, supported by

recent gains in gold prices.

•'")"#trades in a narrow range in a data-light session,

with $-largely trading in line with peers even amid

political uncertainty.

•.%!continues to improve, supporting equities; /

011(+1.0%) is on its longest winning streak of the year, the/

##$%'2$3!)#42(+0.3%) hits a record

high, and'"#22gains 0.6%.

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

well as our recent publications and collaborations (Global Macro Strategy: Global

FX Positioning: EUR Becomes the Preferred Long Position).

) %#

United States:

It was a subdued session across the globe amid limited first-tier economic releases.

Market participants are seemingly waiting on the sidelines ahead of key events later

this week, including the Kansas City Fed’s Jackson Hole Economic Policy Symposium,

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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

Research as only a single factor in making their investment

decision.

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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

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and trading securities held by a research analyst account.

August 19, 2024 09:56 PM GMT



which will include a speech from Fed Chair Powell, and a speech from BoJ Governor

Ueda at the Diet.

USTs traded in a narrow range in a low-volume session. Ultimately, the curve

modestly twist-flattened, with 2y yields up 2bp and 30y yields down 2bp.

Meanwhile, the USD weakened a fair bit, with the DXY USD Index down -0.6%

absent major macro catalysts.

Commentary from Fed officials continued to support the belief that the Fed will cut

rates in September. Over the weekend, San Francisco Fed President Daly said the

gradual progress on inflation has given her “more confidence” and that the Fed will

need to lower the policy rate in order to “fit the economy we have and the one we

expect to have.” After previously stating that a rate cut may not be warranted until

the end of the year, Minneapolis Fed President Kashkari said he would be open to a

September cut as the balance of risks has shifted away from inflation and more

toward labor given that the labor market is “showing some concerning signs.” He

also added that he does not see a reason for a cut larger than 25bp as layoffs

remain low and jobless claims are not suggesting a notable deterioration.

The New York Fed’s July edition of the SCE Labor Market Survey was released and

showed some weakening signs around the labor market. The proportion of

individuals who reported that they were searching for a job in the past four weeks

rose to 28.4% in July (March: 25.1%) and reached the highest level since March. In

terms of expectations, the average expected likelihood of becoming unemployed

rose to 4.4% (March: 2.8%), the highest level since the series began in July 2014.

A continued improvement in risk sentiment supported global equities, and the S&P

500 (+1.0%) rose for the eighth consecutive day. All major groups advanced, but the

technology sector led the gains. After hitting a record high, gold prices declined

modestly. Brent crude oil futures fell -2.4% amid a bleak demand outlook and

geopolitical developments.

Japan:

yields initially traded higher even though USTs rallied last Friday. For long-end

sectors, this was partially driven by concession efforts ahead of Tuesday’s 20y

auction. For the short end, BoJ Governor Ueda will speak later this week, which

might have weighed on the market given the potential for a hawkish stance

regarding future rate hikes. While the belly of the curve slightly rallied back in the

Tokyo afternoon, the super long sectors continued to sell off. Ultimately, the JGB

curve bear-steepened; 5y JGB sold off 1.5bp to 0.505%, 10y JGB sold off 1.5bp to

0.885%, and 20y JGB sold off 3.5bp to 1.72% on a simple yield basis. TONA-OIS

curve also bear-steepened, but underperformed JGBs particularly in the super long

sectors. XCCY basis tightened on broad sectors.

For the 20y auction on Tuesday, we expect it to be digested smoothly, supported by

demand to square positions. As the strong result of the 30y auction on August 8

demonstrated, there can be decent demand for super long sectors, especially in the

summer season. That said, the current 20y JGB yield of 1.72% is below July’s

auctioned yield of 1.913%, so the absolute level may seem less attractive. Governor

Ueda will speak on Friday, and hawkish comments from him on the back of solid US



Morgan Stanley Research 3

data and strong Japan GDP could lead to a repricing of the future policy rate hike

path. This uncertainty could lead to a "wait-and-see" stance for market participants.

All in all, we expect the 20y auction to be digested smoothly, but not strong as the

30y auction in early August.

 declined on Monday from 147.83 at the Tokyo open to 145.22 by the Tokyo

close without any clear catalysts, as there were no first-tier data releases or

commentary from government officials. This week, we will have Fed Chair Powell’s

remarks at Jackson Hole and Ueda's speech at the Diet on August 23. Given that

many market participants currently see the Fed rate cut as a question of not “when”

but “how much,” and the potential for Ueda to express a hawkish stance following

Deputy Uchida’s dovish comment in the midst of the recent market turmoil,

expectations for future rate differentials likely weighed on USD/JPY. Other CCY/JPY

generally traded in tandem with USD/JPY.

Europe:

In European FX, the Scandinavian currencies outperformed as global risk demand

continued to recover from its post-NFP drop. NOK brushed off the decline in Brent

crude prices as '+5*(-0.8%) fell to its lowest level since mid-July. '*

plunged 1.2%, while '+'* fell -0.7% ahead of the Riksbank’s rate decision on

Tuesday, where the central bank is widely expected to reduce its policy rate to

3.50% (P: 3.75%). '+reached a new year-to-date high amid the broad-based US

dollar weakness, and edged closer to 1.11.

Dollar Bloc:

The week began with a sharp move lower in the US dollar (642: -0.6%),

despite relatively limited macro catalysts. - fell 0.3% ahead of Tuesday’s

July CPI release in Canada.

'!33 %#

Asia:

AxJ currencies advanced, driven by a wave of risk-on sentiment. CNY relatively

underperformed; 5 moderately declined 0.3% to 7.1380 while the PBoC

continued to set the 5 fixing rate at a high level (7.1415). THB led the

regional gains as & slid 1.8% to 34.40 amid the weekend surge in gold

prices, which rose to a historical high (XAU: $2,503/oz). *+7gained 1.2% to 1,336

per USD due to its high beta to the US dollar, despite the underperformance in local

equities (KOSPI: -0.9%). +, &, 7, and 4+also gained 0.7% - 1.1% supported

by the risk-on sentiment. 45+was largely unchanged at 83.94 per USD alongside flat

local equities.

AxJ rates also outperformed. In , the 1s5s NDIRS curve shifted down by 1bp

while the 1s10s CGB yield bull-flattened 2bp. 4swaps also bull-flattened, and 2y

G-sec fell 2bp to 6.75%. In &3*3and 3), their 2s10s swap curves fell

2bp and 5bp, respectively, supported by market views that the Fed will begin cutting

rates in September. In 4, the 2s10s IndoGB yield curve twist-flattened 4bp;

10y IndoGB yields fell 2bp to 6.68% and 2y yields rose 2bp to 6.44%. *rates

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MGlobalMacroCommentary|NorthAmericaAugust19AlexandraMaier!"#$#$%&#'()$*ZoeKStrauss+,...

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