Three reasons why it is not the time to buy the market bottom – Morgan Stanley

After markets suffered their worst first-half-year performance in decades, stocks have bounced on hopes the Fed may ease up on monetary tightening. See three reasons why this could be wishful thinking, according to economists at Morgan Stanley.

Inflation is far from being tamed

Granted, supply chains may be clearing, and energy prices are dropping. But this is partly the result of short-term fixes, such as added supply from strategic oil reserves, which could be offset quickly. In addition, even if energy-related inflation does cool, overall US inflation may be slower to fall given that a significant portion of it is linked to the fast-recovering services sector, where prices for items like rent and medical services may remain stubbornly high.”

The Fed’s policy rate still has room to rise 

“Currently inflation is 8.6%, per the consumer price index, and 5.2%, per the Fed’s preferred personal consumption expenditures gauge. At this pace, we would need to see genuine damage to the labor market before the Fed would change course. And, as evidenced by June’s job report, the market remains robust.”

Consumer and corporate spending outlooks are strong 

“Though consumer confidence and CEO sentiment are weak, consumer behavior has not changed. Households’ cash and money market deposits, estimated at about $2.3 trillion, could cushion balance sheets and consumption. In addition, corporate capital-spending intentions have remained strong, durable goods orders have continued to beat expectations, and housing-sector activity levels are nowhere near recessionary. Such economic resilience would likely suggest the Fed’s current hawkish path can continue.”