*SAVE FOR WEEKEND*Morgan Stanley Believes There's A 90% Chance The Fed Will Avoid September Liftoff

• Morgan Stanley believes there is a 90 percent chance that the Fed will choose not to raise interest rates in September
• The firm sees a pair of indicators that upcoming U.S. economic data could fall short of consensus expectations
• The firm believes the most likely outcome from the September FOMC meeting is a hawkish pass on a rate hike

In the past several months, Wall Street has been increasing its expectations of a September interest rate hike, but Morgan Stanley disagrees. According to a new report by analyst Matthew Hornback, the firm believes there is a 90 percent chance that the Federal Reserve will choose not to raise rates in September.

Downside to U.S. data
Morgan Stanley sees a couple of troubling indicators that upcoming U.S. economic data could fall short of consensus expectations. First, the firm’s AlphaWise U.S. retail sales tracker indicates only a 0.2 percent month-over-month (M/M) increase in U.S. retail sales in August, lower than Bloomberg’s consensus estimate of 0.4 percent.

Second, the firm’s AlphaWise Real-time Indicator of economic Activity (ARIA) index showed a M/M deceleration of activity in August.

Long Treasuries
Morgan Stanley has been long U.S. Treasuries since early July, and the firm’s Bond Market Indicators (BMIs) have been bullish since June 5. “We suggest maintaining outright longs in the 5- and 10-year sectors and maintaining 5s/30s curve steepeners,” Hornbach explains.

September scenarios
When it comes to the September FOMC interest rate decision, Morgan Stanley sees a 90 percent chance of a pass and a 10 percent chance of a hike.
 

The most likely outcome, according to Hornbach, is a hawkish pass in which the Fed passes on a September hike but strongly hints at a hike before the end of 2015. Morgan Stanley puts the probability of a hawkish pass at 60 percent, a dovish pass at 30 percent, a dovish hike at 9 percent and a hawkish hike at 1 percent.