With interest rates poised to drop, bonds could see a rally- here’s how investors can position themselves.
00:10 — Fed Rate Cut Expectations
00:43 — Weakening Labor Market Impact
02:56 — What It Means for Fixed Income
04:30 — Barbell Strategy & Sector Picks
06:17 — XAGG ETF Opportunities
08:13 — Fixed Income vs. Equities
Transcript:
Caroline Woods
Joining me now, Andrew Szczurowski, Co-Head of Mortgage and Securities Investments at Morgan Stanley Investment Management. Andrew, thanks so much for joining us.
Andrew Szczurowski
Thanks for having me.
Caroline Woods
Let’s start by talking about your expectations for the fed, because the market keeps changing its mind about what the fed is going to do next month. There’s been a lot of noise and a lot of data gaps. Do you think we’ll get another rate cut next month?
Andrew Szczurowski
Yeah, I think we’re we’re, you know, having that data black hole that we had for the during the government shutdown makes it tougher on the fed. But I think we’re going to ultimately get a December rate cut followed by a couple more next year. And I think that the reason why is that we have a continued weakening labor market.
Andrew Szczurowski
If the fed was planning on eventually cutting back towards neutral, that was the plan before the government shutdown. They weren’t going to do just that one cut in kind of October. And then stop. So I think that they want to continue with the plan, provide a little more stimulus to the economy. We’re still above neutral, so it makes sense to continue kind of cutting if you have this weakening labor market, despite the fact that inflation’s a little above, above where they would like it to be.
Andrew Szczurowski
The general trend in inflation continues to be as we go into next year, we kind of pass off some of this tariff inflation. We’re going to be getting closer to both the inflation target. And then they’ll be kind of missing on the labor side.
Caroline Woods
Let’s talk about the weakening labor market. Because in your notes you said it could be that the punch in the face that disrupts the Fed’s plan. What could that look like? And how far off are we from seeing that.
Andrew Szczurowski
Yeah. So look the fed it’s tough for the fed to to kind of they set a goal based on where they think the labor market will be based on where they think inflation will be. And that’s where we get the dot plot. We get their kind of economic forecasts. But and the fed can’t go out there and project a, you know, two week of a labor market because sometimes it can become a self-fulfilling prophecy.
Andrew Szczurowski
And so I said that kind of there’s the old Mike Tyson quote where everyone has a plan until they get punched in the face. And so ultimately, I think the problem we have is that when you look at the strength of the economy and where it’s coming from, it’s not necessarily generating a ton of jobs. You know, we have obviously this big kind of AI data center boom that’s adding a lot to kind of aggregate GDP growth, but it’s not necessarily translating into the same kind of labor growth we’ve seen.
Andrew Szczurowski
And so I think that we talk about a k-shaped recovery for the consumer. I think we also have a k-shaped recovery among among corporations where not everyone’s feeling this kind of 2 to 3% economic growth environment. And because of that, I don’t think that the same that same 2 to 3% GDP growth, if we have that over the coming quarters, it doesn’t get it’s not going to translate to the same hiring that we’ve seen in past cycles, which means the Fed’s going to ultimately want to provide a little more stimulus.
Andrew Szczurowski
Again, the Fed’s above neutral. There’s no reason that you can’t continue cutting, at least to neutral till you kind of feel your way to see if we need to be more stimulative. You at least don’t want to be restrictive. And that’s where they are today.
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