[Daily Outlook] Morgan Stanley: The worst decline in the U.S. bond market may be over

5 min readMay 5, 2022

Former Fed official Quarles: U.S. may experience recession, soft landing is hard:

Randal Quarles, a former Fed vice-chairman for oversight, said the economy could slip into recession as the Fed moves to combat high inflation. “Given the level of inflation and the decline in unemployment, the Fed is unlikely to take control of the economy for a soft landing, and the consequence could be a recession,” he said on the IntraFi Network’s Banking with Interest podcast. Quarles, who left office in December, suggested that, The Fed should have moved to contain inflation earlier, but Biden’s appointment of the Fed’s leader was still uncertain at the time. “If it had been clear then, I think the Fed would have acted earlier,” Quarles said. But Biden “hasn’t done that for months.” Quarles, who is currently chairman of asset manager Cynosure Group, said that given the size of U.S. debt, even a modest rise in interest rates would have a significant impact on the economy.

Morgan Stanley: The U.S. Treasury market’s worst selloff may be over:

Morgan Stanley’s chief cross-asset strategist, Andrew Sheets, believes that while the Fed’s monetary tightening is just getting started, the worst sell-off in the U.S. bond market may be over. Morgan Stanley recently ended its underweight bond trading strategy since July, turning neutral on bonds after the 10-year U.S. Treasury yield exceeded its year-end target of 2.6 percent. Bond markets have priced in much of the impact of future rate hikes by the Federal Reserve after U.S. Treasuries fell the most on record in the first three months of the year, Sheets estimates. That has made bond market valuations more attractive, and Morgan Stanley’s optimism about the U.S. economic growth outlook has waned as consumers adjust to tighter financial conditions. “We think bond yields can hold steady around current levels,” Sheets said in an interview. “Prices are important now. I think the Fed will stay hawkish and keep raising rates, but long-term bond yields won’t rise too much.

U.S. job vacancies unexpectedly rose to record levels in March, with record numbers of resignations:

U.S. job openings unexpectedly rose to a record high in March, while resignations rose slightly, suggesting employers are still struggling to retain and recruit workers. The Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) released Tuesday showed job openings rose to 11.5 million in March from 11.3 million in February. Economists polled by Bloomberg had expected 11.2 million. Meanwhile, the number of quitters in March was the highest since records began in 2000, at 4.5 million. The quit rate, a measure of voluntary separations as a percentage of total employment, edged up to 3 percent. Job vacancy data showed demand for labor remained strong in March as employers hired to meet strong consumer demand for goods and services. Businesses are also still struggling to recruit qualified workers, putting upward pressure on wages and causing job openings to rise. In addition, the U.S. Labor Department is scheduled to release its monthly employment report on Friday, which is expected to show that U.S. employment rose by 390,000 in April.

ECB Executive Director Schnabel: Rate hike as early as July to curb inflation:

ECB Executive Council member Isabel Schnabel said it was time for policymakers to act to curb inflation, with a rate hike likely as early as July. “It’s not enough to talk about it now, we have to act,” she said in an interview published by the German newspaper Handelsblatt on Tuesday. “From today’s point of view, I think a rate hike in July is possible.” Schnabel’s remarks came days after ECB Deputy President Luis de Guindos pointed to the possibility of a rate hike in July, but it could be Sex is not high. Other ECB policymakers also mentioned a possible rate hike early in the third quarter. Schnabel is considered one of the most influential members of the Executive Council. The 50-year-old German believes that inflation pressures are “spreading” after consumer prices surged 7.5 percent in April and the central bank must “prevent high inflation expectations from becoming entrenched”.

Traders are betting on the BoE joining the “50bps club” by September:

If markets prove correct, the Bank of England will accelerate the tightening cycle with the biggest rate hike in nearly three decades. Swaps tied to the meeting date show traders are betting the Bank of England will raise rates by 125 basis points ahead of its September meeting. That means three of its next four meetings will raise rates by 25 basis points and one by 50 basis points. The latter has not been seen since 1995, two years before the Bank of England became independent. Inflation is soaring around the world, prompting central banks to consider unconventional rate hikes. The Fed is expected to raise rates by 50 basis points at its ongoing meeting, which the Reserve Bank of New Zealand did last month. Economists have thus begun to speculate on whether the normally dovish European Central Bank will follow the same path.

Russia temporarily avoided a debt default, and some investors received payments in U.S. dollars:

Russia has temporarily avoided default on foreign currency debt for the first time in a century. Three investors, who asked not to be named, said their custodian bank had received the payment. At least one major international clearinghouse has received and processed payments for eurobonds maturing in 2022 and 2042, according to people familiar with the matter who were not authorized to speak publicly on the matter. After Russia invaded Ukraine, the international community imposed extensive financial and economic penalties on it. These include sanctions on some of Russia’s largest banks, asset seizures and a freeze on the country’s foreign exchange reserves.

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