Morgan Stanley strategists have been almost apologetic about their view that the stock market would struggle, in a year in which the S&P 500
has gained 16%. But less remarked upon is that the investment bank’s team made another wrong call, in being bullish government bonds.
“We stand alone, with conviction, telling investors to buy government bonds, despite incessant selling and weak price action, driven by backward looking and – in our view – questionable narratives,” say the team led by Matthew Hornbach.
The yield on the 10-year Treasury
has climbed 43 basis points this year, and the yield on the 30-year Treasury
has gained nearly the same, 40 basis points. Yields move in the opposite direction to prices.
The strategists in particular are recommending the 5-year U.S. Treasury
and the 30-year Treasury inflation-protected security.
One narrative they shoot down is the idea of a foreign buyer strike. “The yield curve is too inverted to attract overseas investment, so the logic went. And won’t investors abroad – especially those in Japan – repatriate capital instead?” But the Fed’s financial accounts report showed that far from selling, overseas investors bought more Treasurys last quarter than in any quarter but one going back a decade.
But most of their analysis is on the economy, and how unimpressed they are by it. They point out that gross domestic income — which in theory, should produce the same account of the economy that gross domestic product does — is showing far more feeble growth than GDP does. Last year, GDP+, the average of real GDP and real GDI, grew at just a 1% clip. (That discrepancy continues — in the second quarter, GDP grew by 2.1% while GDI rose by just 0.5%.)
They also note that the risks of a negative monthly payroll print are growing. Just taking into account the slowing momentum, a two-standard deviation sized downside miss could turn payrolls negative as early as the October report that is released in November. The recent 310,000 downward revision to past payrolls was unusually large outside of recessions, they add.
The National Association of Credit Management’s monthly survey of U.S. credit and collections professionals reached a new low in August, and credit managers reported a new deterioration in the amount of credit they extended. “This should revive concerns from earlier in the year that banks would pull back on credit provisions,” they say, with some other NACM data, on sales and dollar collections, consistent with crash landings.
The big story in markets was in the world of currencies, as the dollar slumped against the Japanese yen
after Bank of Japan Gov. Kazuo Ueda said the country might have data by the end of the year to end negative rates. U.S. stock futures
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rallied in premarket trade as Morgan Stanley upgraded the company to overweight from equal-weight and lifted its price target to $400 from $250, citing the potential for its new machine learning supercomputer, Dojo.
The Fed is now in the “blackout” period before the next rate decision. The Wall Street Journal’s lead Fed reporter says an important shift is under way, as some but not all officials think the risks from tightening too much are balanced by the risks of not tightening enough.
Ahead of Wednesday’s inflation data, the New York Fed will be releasing its monthly look at consumer expectations, which includes a look at inflation expectations.
Instacart has set the terms of its initial public offering, with a proposed market capitalization of $7.5 billion.
Marc Tessier-Lavigne, who resigned as Stanford president in a research scandal, is leaving the board of Regeneron Pharmaceuticals
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