Morgan Stanley (NYSE:MS) economists provide insights into recent economic data and its implications for potential Fed rate cuts.
While market pricing has shifted in favor of two rate cuts this year, the July FOMC meeting is now seen as a reasonable direct meeting, Morgan Stanley said in a note to clients on Friday.
Accordingly, the market is still pricing in a number of rate moves this year. However, the brokerage added that more evidence is needed for the Fed to start cutting rates.
The shift in expectations comes on the heels of a series of economic reports, including April jobs numbers and retail sales data, that have signaled a shift from previous upside surprises to downside surprises.
It is worth noting that the CPI data for April was not significantly lower than expectations, but rather in line with them, which provided relief to the financial markets.
Morgan Stanley had anticipated this change in direction, expecting inflation to return to the upside, but expected the Federal Reserve to keep interest rates on hold until September due to the volatility of the data.
Inflation figures appear to be on a downward trajectory based on April inflation figures. Core personal consumption expenditures (PCE) inflation, which rose to an annual rate of 4.4% in March from 1.6% in December 2023, is expected to slow, with the core PCE inflation rate for April expected to slow to 0.26% on a monthly basis compared to 0.32% in March.
Morgan Stanley expects the three-month annual pace to ease to 2.7% by June.
