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Morgan Stanley’s ‘Buy Any Dip in Bonds’ Call
Two weeks after taking Bill Dudley to task on his suggestion that the worst isn't over for US Treasurys, Morgan Stanley strategists including Matthew Hornbach said "any dip" in bonds should be bought.
"FOMC participants remain as hawkish as ever," Hornbach and co. wrote, commenting specifically on remarks by Chris Waller, who spoke in the aftermath of last week's cooler-than-anticipated CPI and PPI reports in the US.
Waller argued for shorter lags between policy tightening and the impact of th
After the cool-ish June inflation prints, I think a lot of commentators are getting a little too excited about the disinflation scenario. YoY comparisons will be much less favorable in 2H and any number of exogenous events (e.g., Russia once again blocking grain shipments from Ukraine) could contribute to higher prints down the road. I like the bond trade, but I think those who agree with it probably need to exercise patience.
The problem with your thesis in my view, is that although it is technically correct, the market and Fed should care far more about 3 and 6 month moving averages for inflation. Remember 1 year ago there was no SVB problem and the Fed had only recently been hiking rates. The Russia invasion shock was in full force. China was in lockdown from Covid. In other words, a lot has changed since one year ago. Three and 6 month moving averages smooth out the fluctuations month to month but better reflect what is happening on the ground now and they are not going to have the base effects you cite. Also PPI is indicating low inflation in the pipeline for the CPI coming up. Nobody really knows what is going to happen but at this point a reasonable bet is continued disinflation. If that is correct, analysts questioning Waller are spot on.