Morgan Stanley(US:MS)2025-09-25 05:58Investment Rating - The report suggests a bearish outlook on the USD due to increasing Fed dovishness and contrasts with foreign central banks [63] Core Insights - The market pricing of Fed policy is expected to move well below the September 2024 low, with current market pricing remaining approximately 50 basis points above the economists' probability-weighted path [63] - The report indicates that the market-implied trough rate places little probability on a recession, suggesting a skew towards a more dovish Fed path [63] - US Treasury yields are anticipated to decline, with the term premium expected to remain range-bound [63] - The report highlights a tension between the Fed's focus on labor market weakness and the equity market's focus on future earnings improvements [63] - Credit markets are expected to see compelling all-in credit yields with good carry relative to cash and inflation [63] - Emerging Market (EM) sovereign credit is projected to have supportive technicals, with expectations of positive total returns driven by lower UST yields [63] Summary by Sections US Treasury and Fed Policy - The market-implied trough fed funds rate is projected to fall further, with current pricing suggesting a more hawkish Fed path than the baseline [9][63] - The report emphasizes that the Fed's dovish stance contrasts with foreign central banks, which may lead to a weaker USD [63] US Equities - The report notes a potential disconnect between the Fed's concerns over labor market data and the equity market's focus on improving earnings revisions and pricing power [63] Credit Markets - All-in credit yields are described as compelling, with a preference for the belly of the curve (5-10 years) in investment-grade (IG) for carry and roll-down strategies [37][63] - High-yield (HY) bonds are favored over floating-rate loans amid accelerating inflows and better price convexity [63] Emerging Market Sovereign Credit - The report suggests maintaining spread betas slightly lower than the benchmark, with a preference for BB bonds and a focus on specific countries like South Africa, Mexico, and Guatemala [61][63]