Morgan Stanley: A mild CPI could give US stocks a breather; the bond market is doing the Fed's tightening ahead of schedule

PANews, October 12 — Morgan Stanley believes that as global bond yields keep climbing, the bond market is carrying out part of the tightening that would otherwise need to be delivered by the Federal Reserve through its policy rate ahead of schedule. This could reduce pressure for further rate hikes down the road and create room for relief in the stock market.

Morgan Stanley's chief US equity strategist Mike Wilson said the US 10-year Treasury yield has risen by roughly 120 basis points since February, and financial conditions have tightened noticeably. He believes that if the current market-driven tightening is already enough to slow economic demand, the Fed may not need to raise its policy rate further to control inflation in the future. Investors should now focus on two indicators: the performance of financial stocks and bond-market volatility (the MOVE index).

He said that recently higher long-term rates, a stronger dollar and rising oil prices have already pushed financial conditions tighter. Compared with the absolute level of the 10-year Treasury yield, the pace at which yields are rising and bond-market volatility deserve more attention. If the rise in yields slows and bond volatility declines, the market may reassess its previously excessive tightening expectations.

In addition, Wilson believes the upcoming US September CPI data could become a key market catalyst. If inflation continues to ease moderately, it could lower market expectations for further rises in long-term rates and additional Fed rate hikes, providing support for the bond market. The market's current focus is not on whether yields are at high levels, but on whether the pace of yield increases is slowing, whether bond volatility is declining, and whether the financial sector can prove that a high-rate environment can still be absorbed by the economy. If the CPI data is mild and pressure on bonds eases, the Fed may gain more room to observe policy, and the stock market may also see broader upside opportunities.