Morgan Stanley’s Matthew Hornbach sees an opportunity that this week’s two-day Federal Reserve meeting will startle investors.
According to the company’s global head of macro strategy, Federal Reserve chairman Jerome Powell should avoid sounding too optimistic on Wednesday, as central bankers issue their policy statement and Powell holds a press conference.
“The biggest wildcard is that the chairman is sounding too optimistic based on the data we’ve had so far,” he told The Washington City Times’s “Trading Nation” Monday. “The outlook is certainly bright.”
If Powell puts too much emphasis on economic strength, it will be worrying that the Fed will weaken its easy money policy sooner than expected, Hornbach warns.
“The markets may end up reading too much in its optimism and not enough in the need for patience to get more data in,” he said.
His base case scenario is that Powell will successfully dispel Wall Street’s fears about inflation and potentially higher interest rates.
“While the data for the past few months has been excellent, it just wasn’t enough data for the Fed to really channel that confidence into its outlook from here,” Hornbach said. “I expect the chairman to frame it that way. Great data, we just need a lot more of it.”
Hornbach, who expects the U.S. economy to outperform globally, also believes Fed policies will help the benchmark’s 10-year government bond trade sideways through 2021.
“The yield on 10-year Treasury bonds is likely to remain within a certain range for the time being. Our year-end forecast is 1.7%,” said Hornbach. “The expected total return from Treasurys is actually looking pretty good at the moment. So we expect money to come in and keep the market stable in the coming months.”
The 10-year return closed at 1.57% on Monday, up 71% this year.