Well, the flash GDP report for the first quarter comes out on Monday and we thought we'd outline some of Morgan Stanley's thinking on what it is likely to show. Here are some key thoughts:

the slowdown in 1Q growth now looks to have been less severe than previously thought, so the current mildly stagflationary episode looks a bit more benign at this point on both the growth and inflation sides. We raised our 1Q GDP forecast to +1.8% from +1.4% over the course of the week on upside in retail sales, retail inventories and housing starts and downside in headline inflation. And while we are not ready to make any adjustments at this point, our read of the latest auto assembly plans suggests upside risks to our 2Q GDP forecast of +1.7%.

In other words, the economy, while still slowing, is better than we thought a few weeks ago.

So, broadly speaking, at this point the market is pricing in a 25bp cut in the funds target to 5.00% at the October 30-31 FOMC meeting, a second cut to 4.75% at the December 11 meeting, and then a final cut to 4.50% by the third quarter of 2008. We don’t have much argument with the last of these — we have the funds target at 4.75% at the end of 3Q08 — but think the market is pricing the first move significantly too soon and continue to see the Fed on hold through year-end.

In other words, interest rates are likely to come down at the short end of the curve this year and next.

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