If Fed Chair Jerome Powell sounds ‘too optimistic’ this week, he’ll rattle Wall Street, Morgan Stanley warns

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Morgan Stanley’s Matthew Hornbach sees an opportunity the Federal Reserve’s two day assembly this week will rattle traders.

According to the agency’s international head of macro technique, Federal Reserve Chair Jerome Powell should keep away from sounding too upbeat on Wednesday, when central bankers challenge their coverage assertion and Powell holds a information convention.

“The greatest wild card is that the chairman sounds too optimistic primarily based on the info that we have had up to now,” he advised CNBC’s “Trading Nation” on Monday. “The outlook is certainly shiny.”

If Powell locations an excessive amount of emphasis on financial energy, it’ll spark issues that the Fed will pare down its straightforward cash insurance policies prior to anticipated, Hornbach warns.

“The markets could find yourself studying an excessive amount of into his optimism and never sufficient into the necessity for endurance to see extra knowledge come via,” he mentioned.

His base case is Powell will efficiently ease Wall Street fears over inflation and doubtlessly greater rates of interest.

“While the info during the last couple of months has been excellent, it simply hasn’t been sufficient knowledge for the Fed to essentially channel that confidence into its outlook from right here,” mentioned Hornbach. “I’m anticipating the chairman to border it in that approach. Great knowledge, we simply want much more of it.”

Hornbach, who expects the U.S. financial system to outperform globally, additionally believes Fed insurance policies will assist the benchmark 10-year Treasury Note yield trade sideways through 2021.

“The 10-year Treasury yield is prone to stay rangebound in the intervening time. Our year-end forecast is at 1.7%,” Hornbach mentioned. “The anticipated whole return in Treasurys truly appears to be like fairly good at this level. So, we count on cash to come back in and maintain the market secure for the following a number of months.”

The 10-year yield closed at 1.57% on Monday, up 71% this 12 months.

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