Khanchit Khirisutchalual
The recovery in financial markets so far this year may reflect investors’ perception that inflation is slowly coming under control and that the Federal Reserve will ease, and eventually stop, its rate hikes soon.
But Morgan Stanley is of the sight that while inflation has probably peaked, that doesn’t mean the Fed has achieved its mission of reining in inflation, and the recent investor enthusiasm may be premature.
Markets currently expect the Fed to raise rates by 25bp in February. This view is supported by data indicating that inflation has cooled and average wage earnings have slowed, and by comments from several recent Fed speakers, including Christopher Waller, Patrick Harker and Susan Collins.
Morgan Stanley’s Global Investment Committee pointed out three key inflation risks that investors may be overlooking.
Energy costs: “Looking ahead, we anticipate a rebound in oil and gas prices, driven by a reacceleration in global economic growth and an easing of European austerity practices,” said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management. MS analysts expect crude oil prices to rise to ~$107/bbl for the third quarter.
Import prices: As the Federal Reserve’s tightening cycle matures, the US dollar will depreciate and no longer protect consumers from more expensive imported goods.
Service inflation: “While airline costs fell in the latest CPI report, other factors could slow recent progress to curb pricing pressures,” Shalett said. These include labor shortages, strong owner-occupied housing and rent inflation, and resurgent healthcare costs.
Shalett said these risks imply that core inflation may not decline in a straight line until the end of the year toward the Fed’s 2% target. “Rather, the decline is more likely to stall by mid-year, with inflation holding closer to 4%, which could keep rates higher for longer and markets possibly locked in a volatile waiting game.”
Earlier, BMO Capital Chief Executive Daryll White said he expects an inflation “turning point” by mid-year that will lead to a better economic outlook.
