Goal Posts Can‘t Move Forever

Research evidence excerpt

Goal Posts Can‘t Move Forever

Global IdeaM

Exhibit 1: Labor market data suggest little to Exhibit 2: Pricing for the Fed has failed to fall

support Fed rate hikes alongside relatively weaker US data

Source: Macrobond, Morgan Stanley Research Source: Macrobond, Morgan Stanley Research

… then it was 'credibility hikes'… As NFP and, in particular, CPI demonstrably refuted

the narrative of data outperformance leading to hikes, investors' narrative shifted toward

'credibility hikes.' Their argument was that the interpreted-as-hawkish rhetoric from the

June FOMC and subsequent communications from Chairman Warsh (and other Fed

speakers) indicated that the Fed might be willing to hike even in spite of softer realized

data to reinforce its credibility in tackling above-target inflation ( Exhibit 2 ).

… and now we're back to 'future' inflation risks: Well, the July FOMC meeting poured

cold water on this thesis too. Now when we talk to investors, we find they have pivoted

back to arguing for future inflation risks as validating current pricing – and therefore their

unwillingness to sell the USD. The dovishness at the July FOMC, in their view, would

ultimately need to be reversed in perhaps a faster and more disruptive way to

counterbalance what they viewed to be a 'policy mistake' at the July meeting.

We're struggling with this narrative, though. Beyond the fact that we do not see inflation

as problematic as other forecasters, a view which we think will be validated in the July CPI

figure, we note that inflation markets are similarly sanguine about the issue. Both 5y5y

inflation swaps and the 30y US breakeven rate have rebounded a bit since the July

meeting, but the level is effectively back to YTD averages ( Exhibit 3 ).

Morgan Stanley Research 3