Morgan Stanley Says Forget September as JPMorgan Tips Weak Jobs

  • ‘We found little at Jackson Hole to sway our view’: Hornbach
  • Morgan Stanley recommends five-year Treasuries despite losses

Fed's Fischer: I Don’t Think You Can Say 'One and Done'

Treasury bull Morgan Stanley predicts the Federal Reserve will forgo raising interest rates next month, and policy makers said nothing in Jackson Hole, Wyoming, to change its mind.

Treasuries pared a decline Tuesday after Vice Chairman Stanley Fischer failed to reinforce a market interpretation of his recent comments that a rate increase in September can’t be ruled out. Morgan Stanley is recommending investors continue to buy five-year U.S. sovereign debt, even as the securities head for their worst month since October.

Fed Chair Janet Yellen said Aug. 26 that the case for higher rates had strengthened, driving the market-implied odds of an increase at the Sept. 20-21 policy meeting to 42 percent that day, from 24 percent at the start of that week. Fischer, who suggested a jobs report due Sept. 2 will be key, said on Tuesday that the Fed is sensitive to the economic situation outside of the U.S. In any case, jobs data may disappoint, according to JPMorgan Chase & Co.

“We found little at Jackson Hole to sway our view on the U.S. Treasury market,” Morgan Stanley strategists Matthew Hornbach and Guneet Dhingra wrote in a client note. “While August payrolls present an obvious risk, we continue to believe market-implied probabilities for a September rate hike will end at zero, not 100.”

September Odds

The yield on five-year notes was little changed at 1.18 percent as of 5 p.m. in New York, having risen as much as four basis points earlier. It climbed as high as 1.24 percent on Friday, a level unseen since June 23, and has gained 15 basis points this month. Benchmark 10-year debt was yielding 1.57 percent.

Fed fund futures indicate a 36 percent chance that the Federal Open Market Committee will raise rates at the September meeting, according to data compiled by Bloomberg. The probability dropped to zero in late June after the U.K. voted to leave the European Union. The calculation assumes the effective fed funds rate will average 0.625 percent after the central bank’s next increase.

“From my standpoint, September was never on the table,” said Krishna Memani, the chief investment officer at Oppenheimer Funds Inc., which oversees $223 billion, in an interview on Bloomberg TV. “Stanley Fischer is a hammer for the FOMC. If the markets get too complacent, he is brought out to cool the markets off, more than anything else.”

Comments from central bankers during and in the run-up to the Kansas City Fed’s annual symposium last week in Wyoming have split the market. Pacific Investment Management Co. also concluded there was nothing of note for rates in Yellen’s remarks, while Goldman Sachs Group Inc. and Mitsubishi UFJ Securities Holdings Co. saw them as hawkish enough to raise the odds of action next month.

Morgan Stanley has the most bullish estimate among forecasts compiled by Bloomberg, predicting 10-year note yield will drop to 1 percent at the end of March next year. The median is for an increase to 1.8 percent from about 1.58 percent now. The benchmark yield reached a record low of 1.318 percent on July 6.

The August payrolls data have missed the median of economists’ estimates in each of the past five years, JPMorgan analysts led by Jay Barry in New York wrote in a report. The Wall Street firm is also recommending clients to hold on to their investments in five-year Treasuries ahead of Friday’s release.

Release DateResultMedian Estimate
Sept. 4, 2015173,000217,000
Sept. 5, 2014142,000230,000
Sept. 6, 2013169,000180,000
Sept. 7, 2012 96,000130,000
Sept. 2, 2011      068,000

Source: U.S. Bureau of Labor Statistics, Bloomberg

Goldman Sachs raised its “subjective odds” of a move next month to 40 percent from 30 percent based on Yellen’s comments, economists led by Jan Hatzius wrote in a report Friday.

MUFG Securities Americas put the probability of a September hike at 49.5 percent.

“Yellen did not fail to deliver,” John Herrmann, its New York-based director of U.S. rate strategy, wrote in a note. “We warn clients, do not be complacent.”

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