Morgan Stanley Global Macro Forum: Decoding the New Fed
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Morgan Stanley's Global Macro Forum examines new Fed Chair Warsh's initial communication strategy and its market implications. Warsh intends to reduce forward guidance, emphasizing the role of market signals, which has increased interest rate volatility. Markets interpreted Warsh's failure to push back against current pricing as a hawkish signal, driving a bear flattening of the SOFR curve.
The report recommends maintaining SFRZ6M7 curve flatteners, as market pricing overly reflects hawkish tail risks. It also suggests a tactical short in mortgages (FNCL 5.5s versus Treasuries), citing rising long-term volatility from reduced forward guidance, weakening bank demand due to the bear flattening, and persistently elevated currency hedging costs. Additional recommended trades include long volatility, short mortgages, long 15s versus 30s, long agency multifamily versus single-family, and long specific pools versus TBA.
On equities, Morgan Stanley notes that Warsh's reliance on market signals should improve the quality of Fed decision-making, with earnings remaining the primary bull market driver. European equities show high correlation with the restart of the Scope of Hedge (SoH) trade but are currently in a seasonal slump, resembling post-Liberation Day patterns, with slow breadth recovery and weak fund inflows.
The report anticipates that over the next year, the Fed's communication style and balance sheet management may shift significantly, though actual interest rate policy changes will likely be less dramatic. Key live trades include short FNCL 5.5s versus Treasuries entered on June 17, 2025, and maintaining the SFRZ6M7 curve flattener established on May 22, 2026.