The sharp rise in US economic growth in the third quarter was a one-off entertainment-driven event that investors need to look past as output will slow and inflation ebb, putting a stop to the Federal Reserve’s rate hikes.
(Bloomberg) — The sharp rise in US economic growth in the third quarter was a one-off entertainment-driven event that investors need to look past as output will slow and inflation ebb, putting a stop to the Federal Reserve’s rate hikes.
That’s the take of Vishwanath Tirupattur, Morgan Stanley’s head of fixed-income research, who is telling investors to lean into duration — bond market vernacular for moving into debt with longer maturities. Longer duration debt will, all else being equal, see bigger price increases for each notch lower in yields than their shorter-tenor cousins.
“The Fed has done enough,” to ensure inflation is solidly on a path to the central bank’s 2% target, Tirupattur said on Bloomberg Television Tuesday. “They will be pleased with the trajectory of it. This is one of the reasons why we are constructive on duration.”
Wednesday’s fresh read on consumer prices will show higher gas prices lifting the headline figure, while the core rate — which excludes more volatile categories like energy — will have slowed to a 0.18% pace of increases in August versus the prior month, according to the bank’s economist.
The median estimate of economists surveyed by Bloomberg predicts the month-to-month increase in CPI will advance 0.6%.
Morgan Stanley’s team predicts that the yield on the 10-year Treasury note, hovering now at about 4.28%, will end the year at 3.65%.
“The market has in our minds obsessively focused on this immaculate re-acceleration of growth narrative,” Tirupattur said. “We don’t buy into that narrative. The market will come to recognize the economy will slow — there will be a give up in consumption” heading into the fourth quarter.
What Bloomberg Economics says…
“Our analysis suggests GDP growth for the quarter will indeed be stronger than usual, but it won’t last. A large chunk of that strength comes from temporary factors – the “Barbenheimer” summer blockbusters, and concert tours by Taylor Swift and Beyonce – as well as factors that don’t necessarily reflect underlying strength, such as a build up of inventories amid slowing demand.”
—Anna Wong, chief US economist
For the full note, click here
Tirupattur also said that his firm sees the US Treasury department’s recent increase in note and bond sales, as well as added bumps likely to come, as already priced into bonds.
Read more: US Budget Deficits Are Exploding, With No End in Sight
“So all of that will contribute to lower yields at the end of the year,” he said.
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