Morgan Stanley Like Long 5s & 7s/30s Steepeners

Morgan Stanley write “recent data show inflection of trends of 2022. The latest ISM services price index held up well alongside cooling demand, in contrast to the other data that suggest cooling inflation, but healthy demand.”

• “This suggests both a soft landing and a recession as possibilities. We think the unabated strong growth and inflation we saw in 2022 is ending - and we see lower yields as markets respond to economic weakness with pricing of deeper or earlier rate cuts.”
• “Looking ahead, things look bleak as well. The CPI fixings market - which predicted CPI surprises correctly in 10 of the last CPI prints - suggests that December CPI could be another downside surprise relative to Bloomberg consensus. Economic surprise indices are poised to keep rolling over. And our economists expect weak retail sales and a weak Q1 GDP print as well - suggesting more economic weakness ahead.”
• “With this backdrop, we suggest long 5-Year U.S. Tsys (entry at 3.70%) and 7s/30s steepeners or TY/WN steepeners (entry +2bp).”