Morgan Stanley on the Fed: 3 Hikes, You're Out - FJElite

Markets are still pricing a much more aggressive Fed path than the base economic view, with nearly 50bp of hikes priced by March 2027. That is more than 75bp above what is seen as most likely by the economists here and is closer to a scenario where real growth stays near 3% on a sustained basis. The key point is that this hawkish pricing had been closely tied to the AI-led equity rally.

That relationship has started to break down. The Nasdaq 100 has fallen 7% and semis are down 20% from their June highs, but Fed pricing has not meaningfully followed. At the same time, Treasury weakness appears to have reflected technical and supply factors as much as any real shift in the macro outlook, with record first-half investment-grade issuance and higher energy prices playing a major role. Since investment-grade supply would normally ease from June to August, and the AI equity drawdown should help restore that seasonal lull, the view is that Treasuries should start to find more support here.