Morgan Stanley: Add FFJ3/Q3 Steepeners

Over the weekend Morgan Stanley wrote as “recent inflation prints appear sticky, we expect markets to increase the probability of a 25bp hike at the July FOMC meeting (the current modal expectation is no hike in July). At the same time, the market's probability for a 50bp hike in March has been inching up recently, which we think is likely to move lower in line with our economics team's view for more 25bp hikes.”

• “Additionally, Powell has stated in the past that the Fed does not seek to surprise markets with its communication, and we think it is unlikely that the market probability of a 50bp hike will persist.”
• “We suggest investors add FFJ3/Q3 steepeners, which captures rates hikes at the May, June, and July meetings. The market currently has about 49bp priced in total for these 3 meetings - and we think the market could get close to 75bp - as it fades the high probability of a 50bp hike in March and extrapolates close to a full 25bp hike into July. The main risk to this trade is if the Fed signals willingness to hike by 50bp in March.”