Welcome to Thoughts on the Market.

I'm Andrew Sheets, Chief Cross Asset Strategy

to Morgan Stanley.

Along with my colleagues bringing you a variety of perspectives, I'll be talking about

trends across the global investment landscape and how we put those

different ideas together. It's Thursday, June 13th at 2 p.m. Greenwich, meantime.

Last Friday, the U.S. economy produced significantly fewer jobs than expected, and markets cheered.

The S&P 500 jumped 1.1%, capping its best four-day run all year, credit spreads tightened,

and bond prices rose.

A very specific type of reasoning drove these moves.

Bad is now good as poor economic data will make it more likely that the Federal Reserve will reduce interest rates and boost markets.

How much more likely?

Bond markets now expect the Federal reserve

to cut rates by 3 quarters of a percent

over the next 12 months.

We strongly disagree with this bad is good logic and the line of reasoning behind it.

The expectation that easing Central Bank policy to offset weaker data is at odds with both

a wide reading of historical data and monetary theory.

But since many in the market disagree, it feels timely to restate our case.

The first thing to note here is that there are actually quite a few instances

where markets faced a backdrop of weakening economic data and lower or easing

central bank policy. That's no coincidence. Central banks have usually lowered interest rates

...