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Morgan Stanley: Here’s Why We See No Rate Hikes In 2022 And What That Means For Markets

Morgan Stanley: Here’s Why We See No Rate Hikes In 2022 And What That Means For Markets

By Vishwanath Tirupattur, global head of Quantitative…

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This article was originally published by Zero Hedge

Morgan Stanley: Here’s Why We See No Rate Hikes In 2022 And What That Means For Markets

By Vishwanath Tirupattur, global head of Quantitative Research at Morgan Stanley

This has been our outlook week. We published our year-ahead global economics and strategy outlooks last Sunday, and more detailed asset class and country-specific outlooks have been streaming out during the week. At Morgan Stanley Research, our outlooks are the culmination of weeks of deliberation and spirited debate among economists and strategists across all the regions and asset classes we cover. In our highly inter-related world, where everything effectively affects everything else, I am convinced that such a collaborative exercise is necessary. In last week’s Start, my colleague Andrew Sheets summarized the outcome of the process – our outlook for 2022 across markets and economies. This week, I will focus on the key debates we engaged in during the process.

Our economists’ view that the Fed will wait until 1Q23 to make its first interest rate hike, despite their projection that US unemployment will fall to 3.6% by end-2022, was hotly debated. Considering that the current market pricing implies about two full hikes next year, we focused on two key questions:

  1. why does the Fed wait, and

  2. when does the market reflect that delay?

For interest rates and FX markets, this was the crux of the matter, especially in the context of potential changes to the composition of the FOMC. Our economists see two drivers for no hikes in 2022 – falling core PCE inflation and rising labor force participation. The market could see more support for these expectations as soon as March and no later than June next year. Furthermore, they do not see material changes to policy outcomes as a consequence of potential changes in the composition of the FOMC. This is key to our narrative on interest rates and FX: markets first price in a more hawkish Fed outcome (bear-flattening, higher real yields, strong DXY) before shifting to concern that the Fed may be too dovish (bear-steepening, higher breakevens, weaker DXY).

The forecasts our strategists presented were more cautious than our economists’ expectations of strong growth, moderating inflation, and patient central banks, leading us to debate whether this is a set-up for ‘Goldilocks’. Didn’t our economic forecasts imply the best of all possible worlds and, as such, a better environment for markets? As it turned out, in some instances (Europe and Japan equities, for example), this is what our strategists forecast. But across several other markets – US equities, US and European corporate credit, agency mortgages, to name a few – our strategists saw more challenges, especially early in the year.

Central banks may ultimately prove dovish, but that may not be immediately apparent, an uncertain dynamic that could push yields and USD higher. US earnings are already elevated relative to the economy and face a potential tax headwind. In credit, current valuations leave little margin for error, and even modest or idiosyncratic stresses can weigh on returns. Agency mortgages have to contend with the two largest buyers, the Fed and banks, slowing their purchases next year, while other investors will need to digest about US$200 billion more mortgages in 2022 than in 2021.

We also debated whether we should be more constructive on emerging markets. The case seemed reasonable: EM assets underperformed materially in 2021. With better valuations, better growth, and no Fed hike until 2023, shouldn’t we join the chorus calling for improvement? The debate around this point was robust, but we settled on ‘not yet’. We think that the market will be slow to price in our ‘later-than-expected’ Fed lift-off, leading to initial USD strength. The one exception is China high yield credit, where we think that the market is underestimating the resolve and ability of policy-makers to control disruption in the property sector, leading our credit strategists to turn bullish on China high yield.

Another topic of debate was the divergence between US and European equity markets. In their base cases, our equity strategists forecast a 5% decline in the S&P 500 versus an 8% rise in MSCI Europe. After all, for more than a decade, US stocks have outperformed European equities meaningfully.

Part of the rationale is idiosyncratic: US equities face a potential tax headwind to earnings and a much larger rise in real rates than other developed market regions. Those factors alone could equate to a double-digit adjustment, before considering valuation differences. Our equity strategists expect to see the best earnings growth next year across different regions in Europe and greater uncertainty about earnings in the US. Furthermore, thanks to lower inflationary pressures, the ECB can afford to be more patient than the Fed. Even though US equity underperformance has been rare since the global financial crisis (GFC), it is worth noting that such occurrences were less uncommon before the GFC.

Enjoy your Sunday.

Tyler Durden
Sun, 11/21/2021 – 15:30





Author: Tyler Durden

Economics

FTC Demands Wal-Mart, Amazon & Others Participate In Supply-Chain Probe

FTC Demands Wal-Mart, Amazon & Others Participate In Supply-Chain Probe

Shortly after President Biden sat down with top executives from…

FTC Demands Wal-Mart, Amazon & Others Participate In Supply-Chain Probe

Shortly after President Biden sat down with top executives from Wal-Mart, a handful of regional grocers and others to hold a “round table” to discuss “supply chain” issues, the FTC announced Monday afternoon that it would launch an investigation into the factors contributing to these types of disruptions, which have been blamed for contributing to inflation by helping to drive up prices.

Just as reports claimed the supply chain crunch appears to finally be waning, President Biden sicced the FTC on the issue. Once again, it’s bureaucracy to the rescue; and anybody who doesn’t go along with the Biden Administration’s preferred narrative (ie that this is part of a global phenomenon, and that the US isn’t unique) better hope the administration doesn’t accidentally make things worse.

At any rate, it’s bureaucracy to the rescue.

And we don’t say that because we think America’s ports need assistance (they clearly do). The problem is that the supply chain crunch goes far beyond the ships and the ports and the truckers. It’s what an economist might call a “complex”” issue.

While President Biden met with a senior Wal-Mart executive in person, and in front of the cameras, as part of Monday’s “supply chain round table” at the White House, Bloomberg says it is ordering large retailers, wholesalers and consumer good suppliers including Amazon and Walmart to provide the White House with “detailed information” that might aid in a newly launched inquiry into the ongoing supply chain disruptions that are contributing to President Biden’s inflation (or should we say, reflation?) fears.

In addition to Wal-Mart and Amazon, the investigation will target Kroger, Associated Wholesale Grocers, McLane, Procter & Gamble, Tyson Foods, Kraft Heinz and others who are expected to receive their orders from the FTC on Monday. Firms have 45 days to respond.

It’s believed the administration intended this is a message to companies everywhere: don’t raise your prices unless you absolutely need to, because the White House will be checking the receipts, waiting to bust anybody who can even be remotely construed engaging in price gouging.

According to BBG, information being sought by FTC includes primary factors disrupting their ability to obtain, transport and distribute products, impact of those disruptions on delayed or canceled orders, increased costs and prices, what firms are doing to curb disruptions.

The study will focus on determining whether supply chain problems have led to bottlenecks, anti-competitive practices or higher prices, the agency said in a statement.

FTC Chair Lina Khan said in a statement she was hopeful that the study would “shed light on market conditions and business practices that may have worsened these disruptions or led to asymmetric effects.”

The FTC is also asking firms to return the information it’s requesting as soon as possible. Firms will have 45 days from the date they receive the order to respond.

“Supply chain disruptions are upending the provision and delivery of a wide array of goods, ranging from computer chips and medicines to meat and lumber,” FTC Chair Lina Khan said in a statement announcing the investigation.

President Biden and his team clearly intended Monday’s “round table” with “supply chain” executives like the leaders of Wal-Mart, Food Lion and others as a distraction. Readers can watch the “round table”, held at the White House Monday afternoon, at their convenience.

But allow us to save you some time, because, at the end of the day, Biden doesn’t need their help.

But he may need them to pay higher taxes, on top of rising costs and expenses for their businesses, to help offset the costs of his social spending package which is expected to further stoke inflation.

Tyler Durden
Mon, 11/29/2021 – 18:00

Author: Tyler Durden

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Economics

4 Cyber Monday Stocks to Buy: ROKU, PYPL, TWLO, V 

As the markets continue to chop around all-time highs — leaving both bulls and bears believing they are “in the lead” — I wanted to veer from our…

As the markets continue to chop around all-time highs — leaving both bulls and bears believing they are “in the lead” — I wanted to veer from our typical top stock trades routine and look at some potential bargain-bin Cyber Monday stocks to buy. These may not be the typical quick-trade candidates, but longer term swings so long as they do not break down too much further from current levels. Let’s get started.

Cyber Monday Stocks to Buy No. 1: Roku (ROKU)


Click to Enlarge
Source: Chart courtesy of TrendSpider

Roku (NASDAQ:ROKU) is the first on our list, with shares down around 50% from the highs — more than any other stock on this list. Nonetheless, you will notice in the disclosure that I am long a majority of these stocks, and I believe in their long-term futures.

I am a trader first and an investor second, but when I see high-quality stocks — “quality” being the key word — on a 40% to 50% discount, I like to begin accumulating them for long-term holds.

I discussed this strategy once in a lengthy YouTube video.

In any regard, we’re in that stage with many of these growth companies. Here is a weekly chart of Roku, which is trying to find its footing in the low-$230s.

Surprisingly, Roku finished higher last week, giving us the potential for a weekly-up rotation over $238.27.

In the short-term that could put the $250 level in play, followed by the gap-fill level and the 21-month moving average near $270. Above that, and the $290 to $300 zone is on the table.

A sustained move below the $223 low, and we could see $200 next. However, after such a beating, the risk/reward is shifting toward the bulls’ favor.

Cyber Monday Stocks to Buy No. 2: PayPal (PYPL)

Cyber Monday stocks to buy PYPL
Click to Enlarge
Source: Chart courtesy of TrendSpider

PayPal (NASDAQ:PYPL) is not down as much as Roku, but it’s still about 40% off the highs. Shares are trying to hammer out a bottom down here, but it’s not clear if that will be the case.

Now, check out Monday’s action. Shares undercut the prior week’s low near $184, then reversed higher. It did so with some bullish divergence on the charts, too.

From here, let’s see if PayPal can clear $293.90, putting $200-plus back in play.

What we don’t want to see is a break below this week’s low and sustained move lower. That could put $175 back on the table.

Cyber Monday Stocks to Buy No. 3: Twilio (TWLO)

Cyber Monday stocks to buy TWLO
Click to Enlarge
Source: Chart courtesy of TrendSpider

Twilio (NYSE:TWLO) has some life, putting in its third-straight daily gain. Shares are up more than 10% from last week’s low, and are going weekly-up over last week’s high.

That’s a great start, but we need more.

Back over $300 would do a lot of good for bulls this week. That puts Twilio back above the 10-day and 21-day moving averages, as well as the 21-month moving average.

If we get that, then Twilio could see an additional push to the 10-month and 50-day moving averages, followed later by the 200-day moving average.

On the downside, however, a break of $275 and the November low really deals this one a tough blow and will likely stop out a lot of longs.

Cyber Monday Stocks No. 4: Visa (V)

top stock trades for V
Click to Enlarge
Source: Chart courtesy of TrendSpider

Last but not least is a high-quality company, but one that’s been caught in a landslide lately: Visa (NYSE:V).

Shares are trying to hammer out a bottom in the $190 to $200 range, but so far, it’s struggling to gain upside traction.

If it can regain $200, I think we need to start talking about the $205 to $208 area, where Visa faces plenty of prior moving averages of various timeframes. The monthly VWAP measure is also there.

Above $208 puts $211.66 in play, the gap-fill from earlier this month. Those are the “immediate upside levels” if bulls gain some traction.

On the downside, though, a break and close below $192 could put $180 in play.

On the date of publication, Bret Kenwell held a long position in ROKU, TWLO, PYPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.

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The post 4 Cyber Monday Stocks to Buy: ROKU, PYPL, TWLO, V  appeared first on InvestorPlace.


Author: Bret Kenwell

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Economics

NU Virus Raises Red Flag For Reflation Stocks 

What a difference a day makes. Black Friday turned into Red Friday after the pandemic took a new turn for the worse. Is it déjà vu all over again? Do…

What a difference a day makes. Black Friday turned into Red Friday after the pandemic took a new turn for the worse.

Is it déjà vu all over again? Do we have control over COVID-19, or does the coronavirus have control over us? 

The narrative for the pandemic finally coming to an end just went south, and with it, short-term investor sentiment. The market doesn’t trade well against heightened levels of uncertainty, including all the protocols, mandates, restrictions and new forms of vaccines coming at a time when investors were increasing equity exposure into what was shaping up to be a very bullish close to 2021. 

Source: Bloomberg.com, Nov. 28, 2021

The only person who I suspect had a clue about this story breaking and the ugly market reaction was Microsoft (Nasdaq:MSFT) CEO Satya Nadella, who sold 839,000 shares of stock Nov. 22-23 for proceeds of roughly $285 million, representing nearly half his current holdings. His previous sales have typically been averaging 42,000 shares per quarter. Why the monster trade? I think inquiring minds would like to know. It deserves a response.

World governments are taking swift action against the newly discovered Omicron COVID-19 strain that is already popping up in other countries outside South Africa, where it first emerged. Dr. Fauci believes it inevitably will be in the United States, and may already be present, just not yet reported. Looking at Bloomberg headlines over the weekend:

WHO Warns of ‘No Information’ on Severity of Omicron

Airlines Scramble as Restrictions Return 

NYC May Be at Start of Winter Surge

Swiss Vote to Keep Covid Health Pass

Botswana Identifies More Cases

Fauci Stresses Need for Vaccination

Germany Has More Suspected Omicron Cases

Dutch Cluster Suggests Omicron Foothold in Europe

Moderna Vaccine for Omicron May be Ready in 2022

Merck Covid Pill Set for Authorization Despite Concerns, MS Says

Given the World Health Organization (WHO) taking its usual wait and see approach, claiming it doesn’t have enough information to come to any near-term conclusions or action plan, it suggests to me that the market will remain in flux until much more is known about the new variant. The only thing the WHO has made its mind up on is what name to call it — NU, for new virus. How about WU — for Wuhan?

So, now the market has to contend with inflationary pressures and what is likely to be an array of anti-COVID measures that could stifle growth heading into 2022. This being a growing likelihood scenario, it stands to reason that capital flows targeting income generation will increase into short-term corporate bonds and into equities of companies in stay-at-home, telecom, consumer staples, utilities, health care and real estate. 

Sources of funds, at least over the very short term, will be energy, financials, consumer discretionary, industrials, materials, metals and mining. Once the smoke clears from the initial wave of selling, technology stocks should recoup most of their losses, as that sector led the market to new highs every time there was a COVID-flareup-related sell-off, and there is little evidence to suggest this will be different going forward.

A couple observations should be noted that will continue to characterize the market landscape. The first is that the strong dollar will likely get stronger as investors seek safety in dollar-denominated assets. The greenback was hit by sellers on Friday as knee-jerk logic kicked in and the Fed’s plan to taper would now be put on hold. The dollar index (DXY) was clearly overbought, but will probably find strong support at the $94.00 level, roughly 2% below where it closed Friday.

A strong dollar is a negative force for multinational corporations that conduct more than 50% of sales outside the United States. Hence, fourth-quarter profits are likely to reflect the impact of foreign exchange (forex) headwinds and pinch S&P 500 earnings growth forecasts for Q4 2021 and Q1 2022. On the plus side, oil prices tumbled last week, with WTI crude ending Friday’s session down 13.06% to $68.15/bbl. Natural gas was unaffected, closing up 7.1% to $5.48/MBtu as shortages in Europe heading into winter are providing a strong bid.

Here, too, investors seeking inflation-hedged income should look at some of the natural gas producers and pipeline operators that are pure plays on natural gas, as this is where strong fundamentals exist for U.S. energy companies with domestic operations serving domestic markets that won’t have their profits impacted by a strong dollar. What was the growingly attractive global reflation trade is now rapidly reverting to the hunker down local and regional economy trade, at least until the U.S. Centers for Disease Control and Prevention (CDC) gives the “all clear” sign. That signal, sadly, is probably several weeks or a few months off.

The post NU Virus Raises Red Flag For Reflation Stocks  appeared first on Stock Investor.







Author: Bryan Perry

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