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Morgan Stanley gives up June rate cut bet as stronger inflation muddies outlook

Published 2024-04-15, 05:16 p/m
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Investing.com -- Morgan Stanley ditched its call for a June interest rate cut and now sees the Federal Reserve cutting three times year following recent stronger inflation and growth data that muddied the outlook for rates.

"Recent inflation prints muddy the near-term path, so we push the first cut to July and take out one forecasted cut this year," analysts at Morgan Stanley (NYSE:MS) said in a recent note, forecasting the Fed to cut three times, down from a prior estimate of four cuts. 

The latest outlook is in-line with the Fed's projection for three rate cuts this year. 

The bank's less dovish view followed recent data that has forced it to boost its growth forecast for the year, forecasting GDP growth to be 2.3% in Q4 this year and 2.1% in 2025, up 0.7% from a prior estimate.   

The analysts, however, call for a rate cut at every meeting starting in July that will see rates falling to 3.625% by mid-2025 on expectations that the disinflationary trend will persist  because the strength in the economy has been driven by surge immigration that has boosted productivity without adding inflation pressures. 

'The US economy is experiencing a positive supply side shock, which allows for a larger economy without adding inflationary pressures," Morgan Stanley said.

But this supply shock of labor will result in a labor market that moves from balance into oversupply this year, pushing the unemployment rate higher and sparking a further easing in wage pressures, it added. 

"Despite the significant upgrade to GDP growth, we now see more slack in the labor market and have little revised our inflation forecasts, the analysts said.

Better-than-expected retail sales data on Monday, meanwhile, added to expectations for rates to be higher for longer on bets that consumer will likely continue to keep spending, underpinning economic growth. 

"A third straight quarter of GDP growth over 3% should be the nail in the coffin for anyone expecting rate cuts any time soon," Jefferies said in a note. 

Markets are now pricing just two rate cuts for 2024, according to Investing.com's Fed Rate Monitor Tool.

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