“It will likely take a few months for the true underlying trends to emerge.”

That’s a quote from Morgan Stanley’s Vishwanath Tirupattur. He wasn’t talking about trends in unidentified aerial phenomena which, it seems, will likewise “take a few months” to sort out.

Rather, Tirupattur was referring to trends in the US labor market, and the questions raised by the jobs report released on February 3. (Yes, analysts and strategists all over the world are still talking about US payrolls 10 days later.)

One concern is that the data isn’t reliable. If that were true, it’d mean some of last week’s price action, which included a notable repricing of the terminal rate in the US, was based on bad information.

But, absent “better” information, market participants have little choice but to go with it. The same is true for the Fed, and because the market is trying to price the Fed, policy versus prices is a distinction without a difference in this case, notwithstanding lingering “disagreements” between officials and traders on when rate cuts are likely to commence.

If you’re Morgan Stanley, the read-through is another Fed hike on top of March’s move, and a “rethink” of various calls.

The bank was Overweight Treasurys, which sold off last week. Now, Morgan is neutral. “Considering how much of an outlier the jobs number was, we think the hard data are too strong for the Fed to look past [and] therefore expect investors to revise their terminal rate assumptions,” Tirupattur wrote, summarizing. As a quick reminder: Those assumptions are now some 30bps from the lows.

“The market debate likely turns to the economy’s interest rate sensitivity and whether the neutral rate should be higher than previously assumed,” Tirupattur went on. “Until we have more clarity on these issues, we think a neutral position is the better call on duration.”

It’s worth briefly noting that investors seem to be underpricing the risk of a higher r-star and a permanently higher floor for inflation. If that’s the case, it raises existential questions for the long-end (i.e., for duration).

Morgan Stanley also revised their call on the dollar in light of the jobs report and the implications for Fed policy. The bank is now neutral there too, from short. The rationale is straightforward. If the US economy isn’t slowing as quickly as many assumed it would, that means the macro thesis which informed investors’ early-2023 RoW bent in equities might’ve been misguided. The US may not underperform economically after all, and if it doesn’t, policy divergence trades (e.g., a weaker dollar on a relatively dovish Fed versus a hawkish ECB and a leadership change at the BoJ) may not pan out.

“Our FX strategists expect that investors are likely to reduce USD short positioning [and] a higher terminal rate also means that the prospect of the markets pricing additional Fed rate cuts in the near-term has diminished, reducing the likelihood of USD softening,” Tirupattur remarked. The dollar came into the January CPI report riding a two-week win streak.

The bottom line, from Morgan Stanley, is that the latest US jobs report was a “big enough surprise to rethink our expectations for the Fed and views on the markets.” They aren’t alone. February 3 is increasingly being described, with a little hindsight, as a possible inflection point.