Morgan Stanley Clashes With Goldman on Jobs Data Traders Ignored

Updated on
  • Goldman raises odds of Fed hike to 55% after payrolls report
  • Morgan Stanley says lack of price pressures to stay Fed’s hand

Markets in Control of Fed With Good Intentions

The divide has grown between Goldman Sachs Group Inc. and Morgan Stanley over the likelihood of higher U.S. interest rates this month thanks to a payrolls report that failed to sway traders either way.

Goldman analysts Jan Hatzius and Zach Pandl saw the 151,000 jobs added in August as enough to boost the chances of action at the Federal Reserve’s Sept. 20-21 meeting to 55 percent. Morgan Stanley strategists led by Matthew Hornbach say they’re staying bullish on government bonds on the view that continued slack in the U.S. labor market and an absence of inflationary pressures will stay the central bank’s hand.

For investors, the lukewarm report gave no clear signals on timing, with market-implied odds of a rate increase this month holding at about one-in-three. Two-year Treasury yields, which tend to be more sensitive to the outlook for monetary policy, dropped as low as 0.74 percent Friday. They touched an almost three-month high of about 0.85 percent at the start of last week after Chair Janet Yellen capped days of hawkish Fed comments by saying the case for higher rates had strengthened.

“Our Fed call has remained resilient in the face of inevitable hawkish chatter that, just like hope, springs eternal,” Hornbach and his colleagues wrote in a Sept. 2 note to clients. “Our U.S. economists still expect the Fed to remain on hold through 2017.”

The yield on the two-year Treasury note was little changed at 0.79 percent at 9:54 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 0.75 percent security due in August 2018 was 99 29/32.

Futures signaled a 36 percent chance of tighter policy this month, according to data compiled by Bloomberg. The calculation assumes the effective fed funds rate will average 0.625 percent after the central bank’s next boost. The probability rose to 42 percent on Aug. 26 after Yellen said at a symposium in Jackson Hole, Wyoming, that “the continued solid performance of the labor market and our outlook for economic activity and inflation” had strengthened the case for higher rates in recent months.

“The speech by Chair Yellen at Jackson Hole suggested a relatively low bar” for the payrolls report, Hatzius and Pandl wrote in a client note dated Sept. 4. “Back in the spring, the committee was ready to go in June or July, but then the weak May payroll report and the Brexit vote interfered. Now both of these worries have dissipated.”

No Consensus

The divergence of views over the implications of the latest employment numbers for tightening isn’t limited to analysts. Bill Gross, manager of the Janus Global Unconstrained Bond Fund, says a September hike is “close to 100 percent,” while his former firm, Pacific Investment Management Co., stuck to a call that action this month “is very unlikely.”

Goldman has been warning since at least February that traders weren’t prepared for how far the Fed would raise rates, and that Treasury yields were poised to climb. Hatzius predicted then, at a conference in Sydney, that the yield on the 10-year note would end the year at around 3 percent.

By contrast, Morgan Stanley called 2016 the “Year of the Bull” for bonds in a March report. Its forecast for 10-year Treasury yields to decline to 1 percent by the end of the first quarter next year is the most bullish among more than 60 complied by Bloomberg.

The median estimate is 1.8 percent, from 1.60 percent currently. The benchmark yield reached a record low of 1.318 percent in July.