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Morgan Stanley January 18, 2025 Global Macro Strategy Summary

Key Recommendations:

1. Position for March Fed Rate Cut: Expect disinflation and fiscal factors to support a 25bps cut. Buy 5-year Treasuries (e.g., 4.41% target) and sell 10y TIPS breakevens (2.44% short). Term premium and market pricing gaps justify long duration play.
2. Short US Dollar: Downto 1.03, avoid stretched positioning vs EUR/JPY/GBP. Trump tariffs likely priced in, focus on divergent US-Japan rate paths.
3. G10 Currency Trades: Long EUR/USD (1.028 target), GBP/USD (1.27 target), AUD/CNY (5.45 target). Neutral/Short USD/CAD, CHF/JPY, EUR/AUD.
4. Japan: Short USD/JPY to 145, long 20y JGB vs 5y OIS. Expect BoJ delays as Fed leads.
5. Euro Area Divergence: Long EUR/USD via steepener trades, short Bunds. Monitor ECB policy normalization and political risks.

Core Views:

• US: Cooling inflation (Dec CPI miss) supports cut expectations. Model discrepancies show Bunds/TIPS overpriced.
• Global: USD bearish trend continues, JPY & EUR tactical buys. Gold & Crude neutral on marginal supply/demand dynamics.
• Emerging Market Equity: Selectivity within Asia/Pacific: Outperform US/EM, with catalysts in Junior Banks/Industrial Cash Flow.

Key Risks:

• Unexpected inflation surge (Fed policy pause), weaker UK fiscal stance delayable BoE cuts.
  Region China risks via tariff/financial markets. Germany elections destabilize, Italy fiscal uncertainty amplifies bond spread widening.

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