Add Morgan Stanley to the list of banks who are lashing out against the Fed’s interminable easy monetary policy (as we pointed out last week, the most notable recent entrant was Bank of America which had a simple message to Yellen: “Take That Punch Bowl Away”).
In a note from Morgan Stanley’s Hans Redeker, which attempts to explain the Fed’s increasingly cautious message on risk prices (incidentally, the same as Goldman which just yesterday cautioned that it was “Troubled By The Fed’s Growing Warnings About High Asset Prices”) the bank’s FX strategist writes that “by now markets have become too distorted.”
Picking up where Goldman started back in March, when the bank lamented the disconnected between the Fed’s rate hikes and easier financial conditions, Redeker writes that DM central banks collectively turning towards a more hawkish stance “leaves the impression of a coordinated approach, explaining the market’s reaction which saw bond yields rising at the quickest pace since autumn last year (when investors put their money on the ‘Trump boom’ which eventually failed to emerge).”
Echoing Citi’s ongoing observations, Redefeker then observes that this time, unlike in 2015, “Rising bond yields only led to a small risk dip from where markets quickly recovered once it became clear that central banks may lean against financial conditions, but have no interest in pushing markets over the edge by overly tightening conditions. It is the low level of current and anticipated inflation which suggests that central bank tightening is not inevitable at this stage. It is, instead, an option, which central banks are willing to exercise should financial conditions stay supported from now.”
This too is nothing new as money market participants “have consistently bet against the Fed dots, hoping that US monetary authorities would have to capitulate in front of markets once again.”
